00 Bangladesh 1 78

Pilot Investment Climate Assessment
Improving the Investment Climate in Bangladesh

An Investment Climate Assessment Based on an Enterprise Survey Carried Out by the Bangladesh Enterprise Institute and the World Bank
June 2003
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2003 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, USA The material in this work is copyrighted. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or inclusion in any information storage and retrieval system, without the prior written permission of the World Bank. The World Bank encourages dissemination of its work and will normally grant permission promptly. For permission to photocopy or reprint, please send a request with complete information to the Copyright Clearance Center, Inc, 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, www.copyright.com All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org Library of Congress Cataloging-in-Publication Data has been applied for.
Contents
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Acknowledgments Acronyms and Abbreviations Executive Summary 1. Investment Climate Matters Key Features of the Investment Climate Governance Infrastructure Access to Finance International Integration Human Resources Linking the Investment Climate with Growth An Overview of the Bangladesh Economy The Surveyand What Its Findings Reveal 2. Bangladeshs Investment Climate in International Perspective A Strong Macroeconomic Performance Poor Integration with the Global Economy Serious Deficiencies in Infrastructure Power Transport, Ports, and Customs Telecommunications Governance Problems Governance Quality Entry Access to Finance Lagging in Human Resources A Weak Record in Technological Innovation 3. The Effects of Bangladeshs Investment Climate on Firms International IntegrationThe Potential of Exports and the Rise of a New Industry Governance a Big Burden on Firms Regulation Corruption
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Legal System Access to Finance a Growing Concern Flexible Rules for Labor Greater Difficulties for Small- and Medium-Size Enterprises Comparing the Investment Climates in Chittagong and Dhaka Infrastructure Regulation and Corruption Whats the Bottom Line? Simulating the Gains from a Better Investment Climate 4. Conclusions and Policy Recommendations Easing Bottlenecks in Infrastructure Power Telecommunications Transport, Ports, and Customs Strengthening Governance Improving Access to Finance Appendix 1: Sampling Methodology Trade Associations Contacted Chambers of Commerce Contacted Other Sources Government Sources Others Appendix 2: Technical Appendix Regression Analyses Simulations Indexes Appendix 3: Standard Investment Climate Tables References
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42 42 42 45 46 46 47 50 52 53 53 53 53 56 56 57 57
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Acknowledgments
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The authors gratefully acknowledge financial support from the United Kingdoms Department for International Development (DFID), which supported the implementation of the survey and the collaboration with the Bangladesh Enterprise Institute (BEI) in the survey and analytical work. BEI staff contributing to this report include Farooq Sobhan and M. H. Khaleque. World Bank staff contributing to the report include Khurshid Alam, George R. G. Clarke, David Dollar, Giuseppe Iarossi, Esperanza Lasagabaster, Syed A. Mahmood, Giovanni Tanzillo, and Scott
Wallsten. The study team appreciates the efforts of advisors of the survey team. Members of the advisory panel include Sayed Alamgir, F. Chowdhury, Ambassador Mustafa Faruque Mohammed, Ambassador M. Aminul Islam, Ambassador M. Shafiullah, Zahid Hussain, and M. Shamsur Rahman. The authors thank Arif Ahamed of World Bank, K. B. Al Masum, and Ayesha Novera for excellent research assistance and the Survey and Research System in Bangladesh for collaborating with the BEI in implementing the survey.
Acronyms and Abbreviations
ASYCUDA++ BEI BPDB BSIC BTTB DESA DESCO DFID DIFE
Automated System for Customs Data Bangladesh Enterprise Institute Bangladesh Power Development Board Bangladesh Standard Industrial Classification Bangladesh Telegraph and Telephone Board Dhaka Electric Supply Authority Dhaka Electric Supply Company Department for International Development Department of Inspection for Factories and Establishments, Ministry of Labor and Employment, Bangladesh
GDP NCBs PGCB UNCTAD UNESCO
R&D TFP
gross domestic product national commercial banks Power Grid Company of Bangladesh United Nations Conference on Trade and Development United Nations Educational, Scientific, and Cultural Organization research and development total factor productivity
Executive Summary
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Over the past decade Bangladesh performed well on many macroeconomic indicators, became more integrated with the world economy, and achieved impressive social gains. This progress in the 1990s is heartening. But the performance of other low-income countries suggests that Bangladesh has fallen short of its growth potential. While Bangladesh has maintained fairly high per capita growth for the past decade, its growth has nonetheless lagged far behind that in some countries. Take China and India. As a result of the more rapid growth in these countries, a big gap has opened up in per capita income, though all three countries started out at similar income levels in the 1980s. Which features of Bangladeshs investment climate pose particular obstacles to economic growth and development? To answer that question, this investment climate assessment uses data from a 2002 survey of a 1001 manufacturing firms in Bangladesh and from myriad publicly available sources. The hope is that its results will help identify the reforms most critical to private sector development and facilitate consensus on a more far-reaching agenda of reform. Some of the main findings: Infrastructure poses some of the most severe obstacles facing firms. Bangladesh fares worse than its neighbors on general measures of infrastructure, and the vast majority of firms report that problems in infrastructure seriously hamper their growth. Electricity problems plague firms in Bangladesh, which has less generation capacity per capita than its neighbors. Firms report experiencing power outages or surges nearly every day they operate. As a result, more than 70 percent rely on electric generatorsat great expense. On average, these generators cost more than $20,000 to purchase and 50 percent more per kilowatt-hour to operate than the price of power from the public grid.
Corruption is pervasive. Bangladesh ranks worse on measures of corruption than its neighbors with more than half the firms reporting it as a major or very severe obstacle. Firms view regulation as a serious problem. Starting a firm in Bangladesh is fairly difficult. And once firms are running, they receive frequent visits from government agenciesabout 17 a year on average. Finance appears to be a looming problem. While most firms appear to have access to finance, it is mostly short-term and nearly 60 percent of firms with a line of credit report having exhausted that credit. Moreover, the very large share of nonperforming loans portends potential difficulties. Small- and medium-size firms are disproportionately affected by all these problems. The smaller the firm, the more of its resources it devotes to bribes and to dealing with government visits and inspections and the less likely it is to have access to formal finance. These problems can pose great barriers to market entry and growth for small firms.
Dealing with these problems is no simple matter. But their size and prevalence underscore the urgency of reform. Among the potentially most important reforms are unbundling electricity generation and transmission, encouraging private investment in the power sector, corporatizing the ports, increasing accountability in the civil service, and streamlining regulatory procedures while eliminating unnecessary ones. What would the private sector stand to gain from such reforms? Simulations based on the survey results estimate the potential gains from a 50 percent improvement in critical investment climate measures. While a 50 percent improvement may sound large, such a change would still leave Bangladesh with, for example, less reliable electricity and longer waits in customs than firms in China endure. The simulation
Executive Summary
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results suggest that the improvements could boost sales growth from 7 percent to more than 10 percent, raise the investment rate from about 9.5 percent to 12 percent, and more than double total factor productivity. Carrying out the needed reforms may be difficult, but the costs of avoiding and delaying them are high.
And the urgency of reform will only increase as the Multifibre Arrangement is phased out by December 2004, deepening the obstacles posed by a poor investment climate. The survey findings show, in rigorous, quantifiable ways, how much the poor investment climate costs firmsand how the voices of the thousand firms call out for reform.
Investment Climate Matters
1. Investment Climate Matters In recent years policymakers and multilateral organizations have increasingly emphasized the importance of a sound investment climate for promoting economic growth in developing countries (Stern 2002b). Emphasizing investment used to mean advocating greater quantities of investment, under the assumption that a financing gap was a barrier to development. Today, few accept this simplistic view. Indeed, recent research shows surprisingly little correlation between investment levels and growth rates, at least in the short run (Easterly 1999). Thus while this report is concerned with investment, it does not focus on its quantity. Instead, it focuses on the institutional and policy environment that determines whether investments pay off in greater competitiveness for firms and in sustained growth for the economythat is, the investment climate.1 A productive investment climate can be broadly thought of as an environment in which governance and institutions support entrepreneurship and wellfunctioning markets in order to help generate growth and development. Key Features of the Investment Climate Defining investment climate precisely is difficult. But one useful definition is the policy, institutional, and behavioral environment, both present and expected, that influences the returns, and risks, associated with investment (Stern 2002b). This environment is generally seen as having three main features: macroeconomic conditions, governance, and infrastructure. Macroeconomic (or country-level) factors include such issues as fiscal, monetary, and exchange rate policies and political stability. Governance relates to government interactions with business, which typically mean regulation and corruption, both of which affect the costs of starting and running a business. Infrastructure refers to the quality and quantity of physical infrastructure (such as power,
transport, and telecommunications). More broadly, it can also refer to financial infrastructure (such as banking)or access to finance. Beyond these features of the investment climate, this report also looks at international integration and human resources. Governance A countrys general structure of governance and the institutions that govern interactions between business and government determine the burden that firms face in complying with government regulations, the quality of government services, and the extent to which corruption is associated with the procurement of these services. A large regulatory burden is often associated with corruption, involving payments to inspectors who visit firms or to officials who grant permits. Corruption can easily deter foreign and domestic investors. Recent empirical research confirms, for example, that measures of corruption are significantly and negatively related to inflows of foreign direct investment (Smarzynska and Wei 2000; Wei 2000). Finding quantitative measures of the quality of government regulation and the cost imposed by corruption is generally difficult. But many researchers and practitioners have tried to produce aggregate statistics that can be used for comparisons across countries. One study looks at the regulatory and administrative issues affecting firms day-to-day operations. Friedman and others (2000) compile indexes of taxation levels and overregulation (essentially, indexes of the business environment) in 69 countries. While they find no evidence that higher tax rates drive firms underground, they do find a significant correlation between measures of overregulation and the size of the unofficial economy: more overregulation is correlated with a larger unofficial economy (Friedman and others 2000). Thus while higher tax rates do not appear to drive away investors, the myriad obstacles to starting and running a business do.
This does not mean that all regulations in developing countries are only onerous and unnecessary. On the contrary, regulations and regulatory agencies can play an important role in mitigating market failures (such as environmental pollution), protecting consumers (for example, against firms that can exercise market power), and ensuring safe working conditions. But regulations in developing countries tend to be more complex and bureaucratic than necessary, are associated with corruption, and often are not intended to correct market failures or protect consumers. Indeed, Djankov and others (2002) find that more regulations are generally not associated with better societal outcomes in developing countries. This report focuses on the costs of regulatory inspections to firms, however; societal outcomes are beyond its scope. A particularly important aspect of governance is the ease with which firms can enter and exit a marketan important determinant of productivity, investment, and entrepreneurship (Lansbury and Mayes 1996). Where entry and exit are relatively easy, poorly performing firms can leave the market permitting their assets to be reallocated to more productive usesand new, more productive and innovative firms can emerge. The entrepreneurship that is unleashed accelerates economic growth and welfare improvements in developing and transition economies. New firms have usually been the fastestgrowing segment in transition countries (McMillan and Woodruff 2002). But the governments of many developing and transition economies, failing to recognize that births and deaths of firms are an inevitable corollary of entrepreneurial risk taking, have erected a maze of administrative obstacles to starting, operating, and closing firms. Compiling data on entry regulations in 85 countries, Djankov and others (2002) discover enormous variation in the number of procedures required to start firms, ranging from 2 in Canada to 20 in the Dominican Republic (with Bolivia and the
Russian Federation also close to 20). The time required to establish a firm ranges from 2 business days to 214 in Mozambique. These procedures can be extremely costly to the economy: in Mozambique the cost of official procedures (that is, excluding bribes) for setting up a new business amounts to 214 percent of per capita income. In Africa, Emery and others (2000) find, this whole maze of often duplicative, complex, and non-transparent procedures can mean delays of up to two years to get investments approved and operational. Moreover, Djankov and others (2002) find that stricter regulation of entry is correlated with more corruption and a larger informal economy. Infrastructure In countries with poor infrastructure, businesses must devote more resources to such tasks as acquiring information, procuring inputs, and getting their products to market. Especially for goods marketed internationally, poor infrastructure can undermine the competitiveness of firmsat best making it more costly for them to operate, and at worst deterring them from entering markets where they would otherwise have been able to operate efficiently. Infrastructure and firm performance interact in several ways. Established firms already connected to utilities are affected by the quality of the service. New firms or firms hoping to expand are concerned with difficulties in connecting to utilities. Access to Finance Economic theory holds that businesses will invest in projects where the expected benefits exceed the cost of investment. But this efficient outcome can be achieved only when entrepreneurs face no credit constraints unrelated to their own performance. Credit constraints are less likely in countries with welldeveloped and well-functioning financial systems. Indeed, a great deal of research has shown the importance of financial sector development for growth
(Levine 1997; World Bank 2001b). A healthy financial system, by freeing firms from financial constraints, allows them to expand according to their expected potential rather than their current stock of cash. Thus countries with well-developed financial systems (banks, stock and bond markets) tend to grow faster than countries with less well-developed systems. International Integration Research has shown that countries that aggressively pursued integration with the global economy (such as Brazil, China, India, Malaysia, Mexico, the Philippines, and Thailand) grew more quickly in the 1990s than those that did not. Indeed, many studies find that openness to trade and foreign direct investment accelerates growth (for example, Dollar and Kraay 2001; and Frankel and Romer 1999). Studies using different measures of openness to tradeincluding the relative size of trade (as measured by imports and exports as a share of GDP) and the degree of trade distortion (as measured by average tariff rates and dispersion)strongly suggest that greater openness is associated with faster growth in both industrial and developing countries. Sachs and Warner (1995) find that openness is a highly significant determinant of growth and, when combined with property rights, might even represent a sufficient condition for growth in poor economies. Kang and Sawada (2000) find a similar effect of openness on growth, arguing that openness, combined with financial development, increases growth in developing countries by reducing the cost of investing in human capital. Human Resources The availability of inputs is a crucial element of the investment climate. For human resources, this implies more than just an abundant supply of workers. It also implies workers with sufficient education and technological know-how.
Linking the Investment Climate with Growth Studies have found strong correlations between measures of investment climate and economic growth (see, for example, Kaufmann, Kraay, and ZoidoLobatn 2000; and Knack and Keefer 1995). These studies typically use data generated from surveys of private businesses and reflect the extent to which investors or firms perceive problems with harassment, corruption, and inefficient regulation. But most macrolevel indicators of investment climate used in these studies are of little help to countries in identifying exactly what needs to be done to create a better investment climate. That requires delving much more deeply, drawing on micro-level evidence from surveys of large numbers of firms, including small and medium-size enterprises. To begin to get an objective, empirical look at the investment climate at the firm level in Bangladesh, this report uses a new survey of 1,001 firms in Chittagong and Dhaka. Following a standard approach for investment climate assessments, it compares the investment climate in Bangladesh with that in other countriesincluding its main competitors, China, India, and Pakistanusing similar surveys and publicly available country-level data sets (box 1.1). And it explores the investment climate indicators from Bangladesh in more depth at the firm level, through analyses that include investigations of how the investment climate differs between Chittagong and Dhaka and between small and large firms. An Overview of the Bangladesh Economy In the 1990s Bangladesh became increasingly integrated with the global economy, with its trade doubling over the decade to reach 31 percent of GDP by 2001. Efforts to increase integration had started in the 1980s and continued into the early 1990s. As early as 1982 the countrys New Industrial Policy began to lift import controls and encourage exports. The
Box 1.1. What Is an Investment Climate Assessment?

Investment climate assessments systematically analyze the conditions for private investment and enterprise growth in a country, drawing on the experience of local firms to pinpoint the areas where reform is most needed to improve the private sectors productivity and competitiveness. By providing a practical foundation for policy recommendations and involving local partners throughout the process, the assessments are designed to give greater impetus to policy reforms that can speed the private sectors growth, leading to faster economic growth and poverty reduction. Produced by the World Bank Group in close partnership with a public or private institution in each country, the investment climate assessments are based on a survey of private enterprises designed to find out what difficulties they encounter in starting and running a businessand, if the business fails, in exiting. The survey captures firms experience in a range of areas financing, governance, regulation, tax policy, labor relations, conflict resolution, infrastructure services, supplies and marketing, technology and training. All these are areas where difficulties can add substantially to the costs of doing business. The survey attempts to quantify these costs. Using a standard methodology, the assessment then compares the survey findings with those in similar countries to evaluate how the countrys private sector is faring and how well it can compete. The findings of the survey, combined with relevant information from other sources, provide a practical basis for identifying the most important areas for reform aimed at improving the investment climate. The assessments look in detail at policy, regulatory, and institutional factors that hamper the provision of good-quality infrastructure services and the functioning of product, financial, and other markets, linking the constraints to firms costs and productivity. In each country the investment climate assessments draw on the guidance and expertise of local partners in government and the business community. The findings and policy recommendations emerging from the assessments are discussed extensively with the private sector and other stakeholders in the country. This broad dissemination of the findings is aimed at engaging not only policymakers but also business leaders, investors, nongovernmental organizations, and the donor community in shaping the national private sector development strategy, forging consensus on the priorities for reform of the investment climate, and laying the groundwork for concrete responses to the problems identified. Updates of the assessment can help track progress in improving the investment climate.
Revised Industrial Policy of 1986 furthered these reforms, loosening more restrictions on imports, reducing antiexport bias by rationalizing tariffs, and easing the import of inputs for production. By the end of the 1990s average nominal tariff rates in Bangladesh had declined from more than 100 percent to about 20 percent, and tariff rates for manufactured imports from 52 percent to 16 percent. The fixed exchange rate system was replaced with a more flexibly administered system, foreign investment was deregulated (with a few exceptions), and restrictions on repatriating profit and income from foreign investment were eliminated.
In parallel, the country undertook substantial investments in human development, making great strides in such areas as primary enrollment, girls education, immunization, child nutrition, and fertility reduction. Primary enrollment, for example, rose from 61 percent in 1980 to 72 percent in 1990 and 97.5 percent in 2000 (table 1.1). By contrast, reforms in other areas, particularly in the institutional and regulatory framework, were far less encouraging. Efforts launched in the early 1990s to deepen liberalization across economic sectors soon lost momentum. The program to divest state enterprises in manufacturing quickly stagnated, and
Table 1.1. Progress in Human Development, Bangladesh

Indicator Poverty headcount rate (percent)b Fertility rate (births per woman) Infant mortality rate (per 1,000 live births) Crude birth rate (per 1,000 people) Crude death rate (per 1,000 people) Life expectancy (years) Gross primary enrollment ratio (percent) Gross secondary enrollment ratio (percent) Adult illiteracy rate (percent) Not available. a. Some data are for 1999. b. Refers to the upper poverty line. Source: World Bank. 1980 5.0 101.4 33.4 10.2 56.9 61.0 18.0 71.0 1990 58.8 4.3 94.0 32.8 11.3 56.0 72.0 19.0 65.0 2000a 49.8 3.0 66.3 19.9 4.8 60.6 97.5 42.0 55.0
state enterprises remained a huge drag on the Bangladesh economy.2 Consolidated data for such enterprises point to low productivity, worsening financial performance in recent years, and, as a result, a growing burden on the public budget. Nor was much progress achieved in reforming basic infrastructure services. In telecommunications Bangladesh became the first South Asian country to permit the entry of private mobile operators, in the early 1990s. But no further liberalization occurred until 2001, when the Telecommunications Act was approved. The act created a regulatory agency and the legal basis for competition in long-distance service, but licenses for new long-distance operators have yet to be issued. The power sector has been plagued by financial problems, large inefficiencies, and limited coverage. Only in the past two years has there been some progress, with the coming onstream of two new independent power plants (privately financed and operated), a reduction in system losses, and some initial adjustments to tariff policies. In addition, in early 2003 the Energy Regulatory Commission Act was approved, defining the legal framework for establishing a regulator. Despite these
recent changes, acute problems persist in the power sector. In the port sector capacity has failed to keep up with the rapid growth in trade and productivity has remained low. Policies to enhance capacity at Chittagong, the main port, and to encourage private participation have met significant obstacles. In the financial sector progress was similarly uneven in the 1990s. Private banks gained market share throughout the decade, and their financial situation improved in recent years, though their share of nonperforming loans remained high at around 17 percent in 2001. The state banks, which continued to dominate the system, recorded large losses and a rate of nonperforming loans more than twice that of the private banks.3 Poor performance contributed to interest spreads of 7 percentspreads large enough to allow the most efficient private banks to earn attractive profits but inadequate to cover the provisions of state banks. Meanwhile, the capacity of the state to govern and to deliver services has weakened. Public institutions are not accountable for their performance. Civil servants face weak incentives and little in the way of checks and balances. And law and order have deteriorated.
Despite this mixed picture in reform, Bangladesh achieved positive growth results. In 19912000 real GDP growth averaged about 4.8 percent a year (60 percent for the period), and its volatility declined. Contributing to this higher growth trajectory was higher private investment and greater integration with the global economy. Private investment increased from a very depressed level of 4 percent of GDP in the early 1970s to more than 15 percent of GDP in the late 1990s (table 1.2). Investment growth has been the most stable stimulus to GDP growth during the last two decades. Exports began to emerge as another major source of growth in the late 1980s, becoming even more important in the 1990s. The export stimulus came mainly from woven garments and knitwear, which grew from $32 million in the early 1980s to nearly $5 billion in early 2000. Woven garments and knitwear now account for 75 percent of Bangladeshs total annual exports. The next largest items are frozen
food and raw jute, which respectively account for 5 percent and 4 percent of total exports. The new growth pattern is reflected in the structure of the economy, which underwent significant changes (table 1.3). The share of agriculture (including fisheries) declined from about 32 percent of GDP in the early 1980s to slightly over 24 percent of GDP in fiscal year 2002. The share of manufacturing, on the other hand, increased from less than 11 percent of GDP in the early 1980s to 15 percent of GDP in fiscal year 2002. However, the latter is still small relative to the share of manufacturing in the South East Asian economies (around 2535 percent of GDP). Also manufacturing activity remains heavily concentrated in Dhaka and Chittagong. Bangladeshs economic performance, combined with its notable success in slowing population growth over the past two decades, produced real per capita GDP growth of 3.1 percent a year (36 percent over the
Table 1.2. Investment and Savings as Percent of GDP, Bangladesh (19812002)

FY81 Investment Private Public Gross Domestic Saving Gross National Saving Source: World Bank. 17.6 12.4 5.2 12.5 17.8 FY91 16.9 10.3 6.6 14.6 19.7 FY99 22.2 15.5 6.7 17.7 22.3 FY00 23.0 15.6 7.4 17.9 23.1 FY01 23.1 15.8 7.2 18.0 22.4 FY02 23.2 16.8 6.4 18.2 23.4
Table 1.3 GDP Composition of Selected Sectors, Bangladesh (19812002)

FY81 Agriculture and fishing Manufacturing Other GDP 32.3 10.8 56.8 100.0 FY91 28.7 12.2 59.1 100.0 FY99 24.3 15.2 60.5 100.0 FY00 24.3 15.0 60.7 100.0 FY01 24.6 14.8 60.6 100.0 FY02 24.1 15.0 60.9 100.0
Source: Bangladesh Bureau of Statistics
decade). Not surprisingly, survey-based estimates of consumption poverty show that the 1990s were a period of declining poverty. While 59 percent of the countrys population was poor in 199192, the poverty rate dropped to 50 percent in 2000, reflecting a decline of 1.8 percent a year (see World Bank 2002a for a discussion of the poverty line applied). This trend is encouraging. In the previous decade, marked by slower GDP growth of about 4.3 percent a year, poverty declined by only 0.8 percent a year in 1983 91 (see Interim Poverty Reduction Strategy Paper 2003). Although the progress of the 1990s is heartening, Bangladesh has fallen short of its growth potential. Other low-income countries grew at a much faster pace. China did spectacularly well, enjoying per capita GDP growth and poverty reduction rates of more than 8 percent a year in the 1990s. India also outperformed Bangladesh, with GDP per capita growth at 4.4 percent and poverty reduction at 5.4 percent a year (figure 1.1). These differences are small in a given year. But small differences in growth rates, sustained for a decade or two, lead to huge differences in living
standards and poverty. In 1980 Bangladesh had an average income of $550 (in current U.S. dollars adjusted for purchasing power parity), slightly less than Indias $668 and slightly more than Chinas $464. In 2001 per capita income (again adjusted for purchasing power parity) had risen to $1,644 in Bangladeshbut to $2,464 in India and $4,329 in China. Thus while the three countries had similar incomes two decades ago, the consistently slower growth in Bangladesh means that today the typical Indian citizen receives nearly 50 percent more income than the typical Bangladeshiand the typical Chinese citizen nearly three times as much income. Bangladeshs failure to keep up with the growth in other low-income countries points to a critical need to improve its investment climate. So does one of the success stories in Bangladeshthe development of the export-led garment sector. One factor in this success has been the Multifibre Arrangement, which gives Bangladesh certain advantages in the sector. When the arrangement expires at the end of 2004, these advantages will endand the factors in the Bangladesh investment climate that have constrained growth will bite even harder.
Figure1.1. Average Annual Annual GrowthReduction Rates in Figure 1.1. Average Growth and Poverty and Poverty ReductionIndia, and in Bangladesh, India, and China, 1990s Bangladesh, Rates China, 1990s
Percent 12 10 8 6 4 2 0 Bangladesh 19912000 India 199399 China 199298 Poverty reduction
GDP per capita growth rate Source: World Bank.
The Surveyand What Its Findings Reveal What factors in the investment climate have prevented Bangladesh from growing more quickly? To gather the firm-level data imperative for answering this question, the Bangladesh Enterprise Institute and the World Bank conducted a survey of manufacturing enterprises in late 2002. The lack of a reliable and recent census of manufacturers made sample selection especially difficult. The sample ultimately was drawn from a census of manufacturing industries provided by the Bangladesh Bureau of Statistics, combined with lists of firms provided by trade associations and chambers of commerce (see appendix 1 for a detailed discussion of the sampling methodology).4 Two criteria were used to choose industries for the survey: the industries had to be important to the Bangladesh economy, and there had to be some overlap with industries covered by surveys in other countries to facilitate comparisons. The two criteria are complementary in Bangladesh. For example, the ready-made garment industry is especially important to Bangladesh, and firms in this industry compete with
similar manufacturers in such countries as China, India, and Pakistan. Six industries were included in the survey: garments, textiles, food and food processing, leather and leather products, electronics, and chemicals and pharmaceuticals. The survey collected data from a total of 1,001 firms in Dhaka (and surrounding areas) and Chittagong (see appendix 1 for a breakdown of the firms by industry, city, and other factors). To get an initial sense of how firms view the investment climate, the survey asked firms to rate the extent to which a large number of factors in the investment climate constrain their operation and growth. By far the most frequent complaint was the constraint imposed by the poor electricity system (figure 1.2). Ranked next highest were problems relating to corruption, governance, and finance. The ranking results raise two issues. First, firms ranked economic policy uncertainty fifth, highlighting the importance of stable macroeconomic policies. Since the importance of these issues is well understood, this report focuses on microeconomic issues. Second, the rankings are subjective and may
Figure1.2. Top Constraints to Business Operation Operationinand Figure 1.2. Top Constraints to Business and Growth Growth in as Viewed by Firms Viewed by Firms Bangladesh, Bangladesh, as
Electricity Corruption Tax administration Cost of financing Economic policy uncertainty Customs and trade Access to financing 0 10 20 30 40 50 60 70 80
Note: Percent of firms rating issues as major or very severe obstacles (percent). Source: Investment climate survey.
not indicate actual economic problems. Most entrepreneurs want cheaper financing, but that does not necessarily mean that the cost of financing is an economic problem. Nonetheless, these rankings provide a starting point for the analysis, and the survey contains a wealth of additional information to investigate these and other issues more objectively and in greater depth. Most important, the analysis reveals that the general constraints identified by the firms impose serious costs on them. The survey findings, while recording some remarkable improvements in Bangladesh in recent years, also underscore many unfavorable features of its investment climate. And they measure the serious effort that the country must undertake if it is to stimulate growth and catch up with faster-growing economies. Among the aims of this study is to aid Bangladeshs national Poverty Reduction Strategy Program, one of whose objectives is to accelerate growth to 7 percent a yearup from less than 5 percent in the previous decade. But is this growth target realistic for Bangladesh? How will it be attained? The Interim Poverty Reduction Strategy Paper, recognizing the private sector as the main engine of economic growth, encourages further opening of the trade regime and removal of the antiexport bias as well as improvements in a host of factors relating to the investment climate. The hope is that this study, by shedding further light on the cost of
a poor investment climate, will help inform the national debate on issues relating to private sector development and aid the consensus building necessary to enact productive reforms.
Notes 1. While social infrastructure is recognized as no less important than its physical and financial counterparts, a deliberate choice was made to exclude the provision of education and health services from the definition of investment climate used in this report. The issues involved in improving social services are quite different from those involved in improving infrastructure and regulation of industry, the focus of the report. In late 2001 state enterprises had physical assets amounting to 35 percent of GDP, employment surpassing 250,000, and investment equal to 9 percent of GDP (World Bank 2001a). The market share of national commercial banks (NCBs) and specialized development banks remained at 58 percent at the end of 2001. The survey and its analysis focus on the investment climate of the urban manufacturing sector and will therefore need to be complemented with analytical pieces on rural development.
2.
3.
4.
Bangladeshs Investment Climate in International Perspective
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2. Bangladeshs Investment Climate in International Perspective Comparing the investment climate in Bangladesh with those in other countries of East and South Asia, as this chapter does, might seem to diminish the progress that Bangladesh has made, since these are countries that have performed relatively well in recent decades. But good performers provide more useful benchmarks than poor performers. If Bangladesh is to meet its Millennium Development Goals, recent estimates suggest, it will need to accelerate GDP growth to about 7 percent a year over the next decade (Bangladesh 2003). So comparing the performance of Bangladesh with that of economies that are doing well provides useful informationboth on areas where it lags behind and on areas where it is doing well. How well does Bangladesh fare in this comparison with other Asian countries? On some measures, quite well, especially given its lower per capita income. Bangladesh has recorded a relatively strong performance in economic growth and inflation. It has greatly increased school enrollment, and in time the improvements in enrollment should boost other
measures of human resources (such as literacy) that remain low. Bangladesh also appears to perform better than other low-income countries in some dimensions of governance, that is, regulatory quality and government efficiency. But Bangladesh performs less well in other areas. It is less integrated with the global economy than other Asian countries, with low trade and foreign direct investment and high formal and informal barriers to trade. It has poor-quality physical infrastructure, especially in the power sector. It does poorly on some measures of governance, with high corruption, a weak rule of law, and a large administrative burden for starting a business. And it performs poorly on technology-related issues, with relatively low spending on research and development and weak basic research. A Strong Macroeconomic Performance Bangladesh has turned in a strong macroeconomic performance in recent years. The countrys per capita GDP growth, negative in the 1970s, rose to 1.7 percent in the 1980s and to 3.1 percent in 19902001 (figure 2.1). Its per capita growth in the 1990s
Figure2.1. Average AnnualAnnual Per Capita GDP Growth in Figure 2.1. Average Per Capita GDP Growth in Bangladesh and Bangladesh and Comparator Countries, 19902001 Comparator Countries, 19902001
Percent 9 8 7 6 5 4 3 2 1 0 1
Bangladesh - 1990-2001
Bangladesh -1980s
Philippines
Bangladesh -1970s
Low income
Pakistan
Low & middle income
Malaysia
Sri Lanka
Indonesia
Source: World Bank 2002c.
Thailand
China
India
11
compared favorably with that in other low-income countries, where growth averaged 1.2 percent over the decade. But Bangladesh lagged behind many other countries in East and South Asia, where per capita growth in the 1990s averaged 3.5 percent in India, 3.7 percent in Sri Lanka, and 8.2 percent in China. Nonetheless, Bangladesh made strong gains in per capita income. Moreover, the growth was accompanied byand contributed toa host of other achievements: a decline in the poverty rate (from 59 percent in 199091 to 50 percent in 2000; Stern 2002a), a significant drop in fertility (from 6.3 births per woman in 1975 to 3.3 in 199799), a reduction in infant mortality (from 153 deaths per 1,000 live births in 1975 to 66 in 2000), and impressive gains in combating child malnutrition and starvation. All these gains are consistent with recent evidence showing that while GDP growth alone is not sufficient for reducing poverty, it does benefit the poor (Dollar and Kraay 2002), making it significantly easier for countries to achieve their poverty reduction goals. In another positive trend, Bangladesh has kept inflation lower than most other countries in East and South Asia. Its consumer price inflation averaged 5.1 percent in 19902001, compared with 7.1 percent in China, 8.6 percent in India, and 9.2 percent in Pakistan (figure 2.2). Moreover, although inflation in Bangladesh remains higher than that in many industrial countries, it appears to be significantly below the level where it has a strong adverse impact on economic growth.1 The reasonably strong macroeconomic record in Bangladesh, however, masks the underlying features of the investment climate that affectand are affected bymacroeconomic performance. Poor Integration with the Global Economy Evidence suggests that Bangladesh is not well integrated with the global economy, despite
Figure 2.2. Average Annual Inflation in BangladeshAverageComparator Countries, and Figure 2.2. and Annual Inflation in Bangladesh Comparator 19902001 Countries, 19902001
Percent 16 14 12 10 8 6 4 2 0
h ay sia
nd Ch in a
ist an
in es
significant growth in trade in recent years. The countrys exports rose from only 6 percent of GDP in 1980 to 15 percent in 2001, while its imports increased from 18 percent of GDP to 23 percent. These shares compare favorably with those of India and Pakistan but less so with those of other low- and middle-income countries, especially in East Asia (figure 2.3). Low-income countries as a group also outperform Bangladesh, with exports accounting for 28 percent of GDP on average, and imports for 29 percent. What accounts for the trends in trade for Bangladesh? One likely contributor to the large growth in trade over the past decade is the significant liberalization in tariffs, which fell from more than 100 percent in 1990 to only about 20 percent in 2001. This liberalization, primarily in the early 1990s, left average tariffs in Bangladesh in 2001 lower than those in India (29 percent), for example (figure 2.4). Even so, Bangladeshs average tariffs remained higher than those in many other developing countries in Asia, including Pakistan (17 percent), China (14 percent), and Indonesia (7 percent). So formal barriers to trade remain. And informal barriers are also important. One such barrier is the relative poor performance of ports and customs in
Ba
Source: World Bank 2002c.
Ph
an ka In do ne sia
ad es
ai la
In di a
pp
ng l
Ma l
Th
ili
Pa k
Sr
iL
12
Figure 2.3. Exports and Imports GDP in Bangladesh and Figure 2.3. Exports and Imports as a Share of as a Share of GDP Bangladesh and Comparator Countries, 2001 Comparator Countries, 2001
Percent 140 120 100 80 60 40 20 0
in co me an d m in idd co le m Sr e iL an ka In do ne sia Ph ili pp in es Th ai la nd Ma la ys ia Lo w an ad es In di a ist ng l Pa k Ch in a h
in
Ba
Lo
Exports Source: World Bank estimates.
Imports
Bangladesh (see the section on infrastructure). Another might be corruption, which imposes indirect costs that might discourage trade. Assessing the importance of corruption relating to imports and exports is difficult. But a survey of business executives carried out in 75 industrial and developing countries for Global Competitiveness
Figure 2.4. Average TariffsTariffs in Bangladesh Figure 2.4. Average in Bangladesh and Comparator and Comparator Countries, 2001 Countries, 2001
Percent 35 30 25 20 15 10 5 0
In do ne sia Ph ili pp in e Ma s la ys ia Sr iL an ka Ch in a Th ai la nd Pa ki st an
a gl an
s de
Note: Figure shows simple averages of tariff rates. Source: International Monetary Fund staff estimates.
In di a
Report 2001/02 generated relevant data (World Economic Forum 2002). The survey asked business executives to rate on a seven-point scale how common irregular payments or bribes were for import and export permits in their country (with 1 meaning common and 7 never). Based on the average scores, the 75 countries were then ranked, with the countries with the lowest average scoresthat is, those where bribes were most commonreceiving the lowest rankings.2 Bangladesh ranked lowest 75th out of the 75 countries (figure 2.5). By contrast, China ranked 38th, and India 58th. Although these qualitative rankings should be treated with caution, they do suggest large informal barriers to trade in Bangladesh. Other evidence of poor integration with the global economy is the low level of incoming foreign direct investment in Bangladesh. As a share of GDP, foreign direct investment in Bangladesh (0.59 percent) is only slightly lower than the average for low-income countries (0.63 percent), and it is slightly higher than that in India (0.50 percent) and Pakistan (0.51 percent). But it is
13
Figure 2.5. Rankings of Bangladesh and Comparator Countries by the Extent of Figure 2.5. Rankings of Bangladesh and Comparator Irregular Payments Irregular Payments forExport Countries by the Extent of for Import and Import Permits Permits and Export
China Malaysia India Thailand Sri Lanka Philippines Indonesia Bangladesh 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75
Strongest Source: World Economic Forum 2002.
Weakest
considerably lower than foreign direct investment in most East Asian countries (figure 2.6).
Serious Deficiencies in Infrastructure In infrastructure, a critical feature of a countrys investment climate, the quality of services appears to be relatively poor in Bangladesh. Business executives surveyed for Global Competitiveness Report 2001/02 ranked Bangladesh lower on this trait than all other developing countries in East and South Asia (World Economic Forum 2002). The executives were asked to rate the infrastructure quality in their country on a scale of 1 (poorly developed and inefficient) to 7 (among the best in the world). Of the 75 developing and industrial countries in the sample, Bangladesh ranked 74th, higher only than Bolivia (figure 2.7). By contrast, Malaysia ranked 20th, Thailand 30th, China 61st, and India 66th. Evidence from the firm-level investment climate surveys confirms that the quality of infrastructure services is a significant problem in Bangladesh, with electricity the biggest concern. Asked to rate the extent to which telecommunications, electricity, and transport
Figure 2.6. Net Incoming Foreign Direct Investment as a Share 2.6.GDP in Bangladesh and Comparator Countries, of Net Incoming Foreign Direct Investment as a Share of GDP in Figure 2001 Bangladesh and Comparator Countries, 2001
Percent 4 3 2 1 0 1 2 3
Indonesia Bangladesh Low Pakistan India income Low & middle China income Thailand Philippines Malaysia Sri Lanka
4 Source: World Bank estimates.
14
Figure 2.7. Ranking of Bangladesh and Comparator Figure 2.7. Rankings of Bangladesh and Comparator Countries by Overall Countries by Overall Quality of Infrastructure Quality of Infrastructure
Malaysia Thailand Indonesia China Sri Lanka India Philippines Vietnam Bangladesh 0 Strongest Source: World Economic Forum 2002. 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75
Weakest
hampered enterprise operations and growth in their country, only 4 percent of enterprises in Bangladesh reported that electricity posed no obstacle (figure 2.8). Electricity was a smaller concern in China, where 37 percent of enterprises reported that it was no obstacle, and in Pakistan, where 21 percent considered it no obstacle. Enterprises in Bangladesh rated services in
other infrastructure sectors higher, with transport posing no obstacle for 19 percent and telecommunications no obstacle for 30 percent. Still, these shares were considerably smaller than those in China and Pakistan. Although these responses suggest that the poor quality of infrastructure is a serious problem for enterprises in Bangladesh, the data are qualitative,
Figure 2.8. Share of Firms in Bangladesh and Comparator Countries Bangladesh and Comparator Countries Is Figure 2.8. Share of Firms in Reporting That Infrastructure No ObstacleInfrastructure Is NoOperations Reporting That to Business Obstacle to Business Operations
Percent 60 50 40 30 20 10 0 Bangladesh Telecommunications Source: Investment climate surveys. China Transport Pakistan Electricity 19 4 30 21 47 44 37 52 47
15
and methodological issues make it difficult to draw strong conclusions. For example, technologically advanced enterprises might be more vulnerable to infrastructure problems than less advanced ones, making them more likely to rate infrastructure as a significant problem. Thus the average score in a country depends on both the quality of infrastructure and the average level of technological advancement, making cross-country comparisons difficult. The following sections therefore explore several quantitative measures of infrastructure development in addition to the qualitative measures. Power With generating capacity short of needs, supply notoriously unreliable, and power outages common, access to reliable power is a prime concern for most manufacturing firms in Bangladesh. Over the past two decades the countrys generating capacity increased almost threefold, from 1.0 million kilowatts in 1980 to
3.3 million. Meanwhile, the population grew only from about 85 million to 129 million, resulting in a modest increase in per capita generating capacity. Even so, generating capacity remains low relative to that in other developing countries in East and South Asia (figure 2.9). While Bangladesh had about 0.03 kilowatts of capacity per capita, India had 0.1, Pakistan 0.12, and China 0.21. The investment climate survey in Bangladesh confirms the conventional wisdom that electricity supply, transmission, and distribution are serious problems. Firms reported experiencing power outages and surges about 250 days a year on averageand many reported outages and surges every day they operate. These power problems impose real costs on firms, seriously constraining business operations and growth. Regression results show that even when industry fixed effects and firm characteristics are controlled for, sales and investment both suffer as
Figure2.9. Electricity Generating Capacity in Bangladesh and Comparator 2.9. Electricity Generating Capacity in Figure Bangladesh and Comparator Countries Countries
Kilowatts per capita 0.7 0.6 0.5 0.4 0.3 0.21 0.2 0.1 0
an ka In di a ist an in es h nd Ba ng la de s In do ne s in a la pp Ch iL Pa k ai Th Ma l ay sia ia
0.58
0.29 0.16 0.08 0.03 0.1 0.1 0.12
Source: U.S. Energy Information Agency.
Ph ili
Sr
16
the number of power disruptions increases. (See appendix 2 for the regression results and a discussion of the methodology used). Indeed, firms reported losing more than 3 percent of production on average as a result of problems in the electricity grid. How do other Asian countries compare? While the median estimate of lost sales due to power outages was 1 percent in Bangladesh, it was 0 percent in China (figure 2.10). Although the estimate was higher for Pakistan, at 2 percent of sales, this difference might be explained by the fact that generators are more common in Bangladesh than in Pakistan. While 72 percent of enterprises in Bangladesh reported having a generator, only 71 percent of firms did in India, 42 percent in Pakistan, and 27 percent in China. The heavy reliance on generators in Bangladesh means that the reported losses seriously understate the true costs of the poorly performing electricity grid. Relying on generators to maintain production is costly. While firms reported paying about 4 taka per kilowatthour from the electricity grid, they pay more than 6 taka per kilowatt-hour to use their own generators
nearly 50 percent more. Moreover, generators are not cheap. Firms tend to pay more than $20,000 for their generators, though some buy very small ones for less than $1,000 and a few reported purchasing extremely powerful generators for more than $500,000. These backup systems impose costs on firms in Bangladesh that those in few other countries must bear, quickly undermining cost advantages that Bangladesh firms might otherwise enjoy. Transport, Ports, and Customs As noted, results from the firm-level surveys suggest that transport is a bigger problem in Bangladesh than in some comparator countries, with enterprise managers in Bangladesh less likely than those in China and Pakistan to say that transport posed no obstacle to enterprise operations and growth (see figure 2.8). This is consistent with evidence from Global Competitiveness Report 2001/02 (World Economic Forum 2002). Based on executives ratings of the quality of infrastructure sectors in their country, Bangladesh ranked 70th among the 75 countries for roads and 72nd for ports (figure 2.11). Although
Figure2.10. Performance Measures Measures for SectorElectricity Figure 2.10. Performance for the Electricity the in Bangladesh Sector in Bangladesh and Comparator Countries and Comparator Countries
Percent 80 Share of firms with generators 70 60 50 40 30 20 10 0 0 Bangladesh Indiaa 0.0 Pakistan China 1 27 1.0 0.5 42 72 Percent 2.5 71 2.0 1.5 Median losses in sales due to power outages 2
Note: a. No data available for India on lost sales due to power outages. Source: Investment climate surveys.
17
Figure 2.11. Rankings of Bangladesh and Comparator Figure 2.11. Rankings of Bangladesh and Comparator Countries by Quality Countries RoadsQuality of Ports and Roads of Ports and by
Thailand Malaysia China Indonesia Sri Lanka India Philippines Bangladesh 0 Strongest Source: World Economic Forum 2002. 20 40 60 75 Weakest Roads Ports
Bangladesh outperformed Sri Lanka, India, and the Philippines in the rankings for roads, it ranked lower than any of the comparator countries for ports. India ranked 57th on ports, and China 51st. Much of the inefficiency in Bangladesh ports is centered in Chittagong port, which handles nearly 85 percent of the countrys imports and exports. One of the most inefficient and costly ports in Asia, Chittagong is plagued by labor problems, poor management, and lack of equipment. The container terminal in Chittagong handles about 10005 lifts per berth a day, well below the productivity standard of 230 lifts a day suggested by the United Nations Conference on Trade and Development (UNCTAD). Ship turnaround time is five to six days, compared with about one day in more efficient ports, and the port faces serious congestion. These problems hamper export growth and investment. How ports and customs work together is critical: firms that import or export rely on well-functioning ports and efficient customs procedures to bring in needed inputs and send out finished products. Here, Bangladesh again performs relatively poorly
compared with other Asian countries. Responses to the investment climate surveys show that the median time required for imports to clear ports and customs in Bangladesh is seven days and for exports, five days (figure 2.12). Although this performance
Figure 2.12. Median Number of Days for Imports and Exports to Clear Ports and Figure 2.12. Median Number of Days for Imports and Customs in Bangladesh and Comparator Exports to Clear Ports and Customs in Bangladesh and Countries Countries Comparator
12 10 8
7 5 5
7 5 3 3
Bangladesh
Pakistan Imports
India Exports
China
Source: Investment climate surveys.
18
compares well with Pakistans, it falls short of that in India and China. Average waits are longer, of course, because of the small number of firms reporting especially onerous waits. The average wait for imports to clear customs in Bangladesh was nearly 12 days, while the average longest wait was 23 days (figure 2.13). For exports the average wait was nearly 9 days, and the average longest wait 14 days.3 These waits can be costly to firms. Regression analysis controlling for industry and firm characteristics suggests that import delays are associated with lower profits, while customs delays for exports are correlated with slower growth in sales and employment and lower investment (Appendix 2). While imports are typically delayed longer than exports, firms tend to be hurt more by export delays. Indeed, each day that exports are delayed in customs is associated with a 0.3 percentage point reduction in investment and a 0.2 percentage point reduction in sales and employment growth. Interpreted causally, these figures suggest that the average wait of nine days for exports reduced the three-year average for
sales and employment growth by nearly 2 percentage points and investment by 2.7 percentage points. Among the firms for which all the relevant data are available, sales growth averaged around 11 percent, employment growth 9 percent, and the investment rate 9 percent. Thus the delays for exports reduced the sales and employment growth rates and the investment rate by nearly a quarter. Telecommunications Enterprises in Bangladesh rated telecommunications a smaller constraint on enterprise operations and growth than other infrastructure sectors. But having a well-developed telecommunications sector is becoming increasingly important. The number of fixed line telephones per 100 people in Bangladesh rose significantly in the past two decades despite relatively rapid population growthfrom 0.11 in 1980 to 0.39 in 2001. Meanwhile, driven by private investment, growth in the mobile phone market took off dramatically. Introduced only in the 1990s, mobile phones had surpassed fixed line phones by 2001 (figure 2.14). In that year there were 0.4 mobile
Figure 2.13. Delays in Ports and Customs Reported by Figure 2.13. Delays in Ports and Customs Reported by Firms in Bangladesh Firms in Bangladesh in Previous Year in Previous Year
Days 25 20 15 10 5 0 Typical wait Longest wait Typical wait Longest wait Import delays Export delays
mean median
Source: Investment climate survey.
19
Figure 2.14. Mobile and Fixed Line Telephones Per 100 Figure 2.14. Mobile and Fixed Line Telephones Per 100 People in Bangladesh, People in Bangladesh, 19802001 19802001
1.0 0.8 0.6 0.4 0.2 0.0 1980
1982
1984
1986
1988 Fixed lines
1990
1992
1994
1996
1998
2000
Mobile phones
Source: International Telecommunication Union 2002.
phones per 100 people, compared with 0.39 fixed line phones. Even so, Bangladesh still lags behind other countries in both fixed line and cellular telephony. In 2001 it had fewer fixed line and mobile phones than the average for low-income countriesand fewer than any of the comparator countries in East and
South Asia (figure 2.15). Pakistan, with the next lowest phone penetration, had 2.4 fixed lines and 0.6 mobile phones per 100 people. India had 3.4 fixed lines and 0.6 mobile phones per 100 inhabitants, while China had 13.8 fixed lines and 11.2 mobile phones. Although difficult to assess accurately, the quality of service also appears to be a problem in
Figure2.15. Mobile and Fixed Line Telephones Per 100 People in Bangladesh Figure 2.15. Mobile and Fixed Line Telephones Per 100 People in Bangladesh and Comparator Countries, 2001 and Comparator Countries, 2001
60 50 40 30 20 10 0
In do ne sia Sr iL an ka h an In di a ne s nd ng l Th Ma la ys ia ad es lip pi Pa k ai Ch i ist la na
Ba
Fixed lines Source: International Telecommunication Union 2002.
Ph i
Mobile phones
20
Bangladesh. In the most recent year for which data are available, Bangladesh had 208 faults for every 100 mainlines, according to the International Telecommunication Union. In comparison, there were 203 faults per 100 mainlines in India, 99 in Pakistan, 38 in Malaysia, 29 in the Philippines, 15 in Sri Lanka, and 13 in Indonesia. Getting a telephone connection also appears to be relatively difficult in Bangladesh. In the investment climate surveys, enterprises obtaining a telephone connection within the previous two years reported a median wait of 90 days in Bangladesh, far longer than the 18 days in Pakistan and 7 days in China (figure 2.16). Governance Problems How does Bangladesh fare in comparisons of governance across countries? Making such comparisons is not easybecause it is difficult to find quantitative measures of such aspects as the quality of government regulation and the cost imposed by corruption. But analyses based on aggregate statistics suggest a mixed performance in Bangladesh.
Governance Quality To assess governance in Bangladesh relative to that in comparator countries, six aggregate measures were used that capture different aspects of governance, including regulation and corruption. Developed by Kaufmann, Kraay, and Zoido-Lobatn (1999, 2002), these measures combine information on up to 60 (mostly subjective) indicators from other sources.4 The six indexes measure perceptions about: Voice and accountabilitythe extent to which citizens of the country are able to participate in the selection of government. Political stabilitythe likelihood that the government will be destabilized or overthrown by possibly unconstitutional or violent means, including terrorism. Government effectivenessthe quality of public service provision and the government bureaucracy, the competence and independence of the civil service, and the credibility of the governments commitment to adhering to
Figure2.16. Median Wait for Fixed for Fixed Line Telephone Figure 2.16. Median Wait Line Telephone Connection in Bangladesh Connection in Bangladesh and Comparator Countries and Comparator Countries
Days
100 90 80 70 60 50 40 30 20 10 0 Bangladesh Pakistan China 18 7 90
Note: Data refer only to firms receiving a fixed line connection within the two years before the survey. Source: Investment climate surveys.
21
announced policies. This measure focuses mainly on inputs that governments need to implement good policies and deliver public goods. Regulatory qualitythe quality of government policies. This measure, based on outputs rather than inputs, focuses on the prevalence of market-unfriendly policies (such as price controls or inadequate bank supervision) as well as perceptions about the burden imposed on businesses by regulation. Rule of lawthe extent to which individuals have confidence in and abide by the rules of society. This includes perceptions about the incidence of crime (violent and nonviolent), the effectiveness and predictability of the judiciary, and the enforceability of contracts.
Control of corruptionthe extent of corruption (that is, the illegal use of public power for private gain).
Plotted on a governance hexagon, these measures of governance show a mixed performance for Bangladesh compared with the 175 developing and industrial countries in the sample (figure 2.17). Bangladesh scores relatively well on the indexes for voice and accountability, regulatory quality, and government effectiveness, exceeding the average for low-income countries on all three measures. In addition, it performs better than China, India, and Pakistan on regulatory qualitybut worse than all three on government effectiveness. On control of corruption, it performs fractionally better than the
Figure 2.17. Governance Hexagon for Bangladesh, 200001 Governance Hexagon for Bangladesh, 200001 Figure 2.17.
Voice and accountability
Control of corruption
Political stability
Rule of law
Government effectiveness
Regulatory quality Note: The misshapen thick line in the middle of the outer hexagon is the hexagon for Bangladesh. The outer line represents the best performance possible. The thick line in the middle, which forms an even hexagon, is the median for low-income countries. The dotted lines represent the 90 percent confidence intervals for Bangladesh. Source: D. Kaufmann and A. Kraay, 2002.
22
average for low-income countries but worse than either China or India. And on both political stability and rule of law, Bangladesh performs worse than the average for low-income countries and worse than China, India, and Pakistan. Entry How costlyand how difficultis it for an entrepreneur to start a new firm in Bangladesh? Data from the World Banks Doing Business project suggest that startup is relatively costly. An entrepreneur in Bangladesh must complete seven procedures to start a firmthe smallest number among a group of comparator countries in Asia (the number for Malaysia is also seven). But the cost of these procedures amounts to 77.6 percent of per capita incomeby far the highest among these countries (figure 2.18). Another measure suggests that starting a business is relatively difficult in Bangladesh compared with other Asian countries. Executives surveyed for Global Competitiveness Report 2001/02,
asked to rate the difficulty of starting a new business in their country, ranked Bangladesh 60th out of the 75 countries, worse than the rankings for all the comparator countries in East and South Asia (figure 2.19).5 Hiring and firing workers in Bangladesh is generally perceived as easier, however. On this measure executives ranked Bangladesh higher than most other developing countries in East and South Asia. Not all constraints to entry are regulatory. Consider how long firms must wait for utilities and other services needed to run a business. In Bangladesh firms reported waiting nearly 70 days on average for an electricity connection, more than 90 days for a gas connection, and nearly 170 days for a mainline telephone connection (figure 2.20). Mobile telephony has shortened the wait for communications services, with firms reporting typical waits of less than a weekand often no time at allfor mobile service. But firms reported waiting more than 260 days on average for construction permits. Combining these waiting times with unofficial payments, as well as
Figure2.18. Number of Procedures and Cost to Start a Firm in Bangladesh a 2.18. Number of Procedures and Cost to Start Figure Firm in Bangladesh 2002 Comparator Countries, 2002 and Comparator Countries, and
14
77.6 12 10 10 51.1 7
90 80 70 60 50 40
26.6
10
8 8
8 6 4
30 20 10 0
15.7
13.2 6.7
14.5
2 0
Ba
Source: World Bank, Doing Business database.
Ph ili
l ng
iL
pp
Sr
Th
Ma l
h es ad
ka
nd
Ch in a
in es
sia
ai
In di a
an
la
ay
Cost as a percentage of gross national income per capita
12 Number of procedures
23
Figure 2.19. Rankings of Bangladesh and Comparator Countries by Difficulty of Starting Firms Countries by and Figure 2.19. Rankings of Bangladesh and Comparator and Hiring Firing Workers Firms and Hiring and Firing Workers Difficulty of Starting
Thailand China Sri Lanka Malaysia India Indonesia Philippines Bangladesh 0 Easiest Hiring and Firing of workers Source: World Economic Forum 2002. 10 20 30 40 50 60 70 Hardest Administrative burden for startups
legitimate connection fees, gives a sense of the difficulties entrepreneurs face in starting viable businesses in Bangladesh. Another way to measure the ease of entry is to assess the availability of subcontractors. Where
Figure 2.20. Average Wait for Utility Connections for Figure 2.20. Average Wait for Utility Connections for Firms in Bangladesh Firms in Bangladesh
Days 180 160 140 120 100 80 60 40 20 0 Mainline Gas telephone Source: Investment climate survey. Electricity Mobile phone
subcontractors are available, entrepreneurs can more easily start a business because they can quickly have a variety of services available to them without needing to house them all within their new, very small business. And in some cases it may be easier to start firms as subcontractors, since these are often highly specialized operations. In Bangladesh, however, subcontracting is almost unknown. In the investment climate survey nearly 75 percent of firms reported never using contractors, and another 10 percent only seldom using them. Access to Finance Bangladesh firms tend to have reasonable access to formal finance compared to other low-income countries. In 2001 credit to the private sector amounted to about 27 percent of GDP in Bangladesh (figure 2.21). Although this ratio was lower than those in some countries in the region, it compares favorably with the average for low-income countries (24 percent of GDP). And it was only fractionally lower than the
24
Figure 2.21. Credit to the Private Sector as a Share of GDP in Bangladesh and Comparator Figure 2.21. Credit to the Private Sector as a Share of Countries, 2001 and Comparator Countries, 2001 GDP in Bangladesh
Percent 160 140 120 100 80 60 40 20 0
a e a e n h es nd sia dl es nesi om ank ista id e in aila lay c L ad m com lipp a in ak h gl ndo ri P M T n & n i S w I w i Ph Ba Lo Lo
In di a
Figure 2.22. Share of Enterprises with an Overdraft Facilityofin Bangladesh Overdraft and Figure 2.22. Share Enterprises with an Comparator Countries Facility in Bangladesh and Comparator Countries
Percent 70 60 50 40 30 20 10 0 Bangladesh China Pakistan Source: Investment climate surveys.
Note: Data are for 2000. Source: World Bank.
ratios in India (29 percent) and Pakistan (28 percent), despite their higher per capita incomes. Other measures confirm this assessment of finance in Bangladesh. For example, nearly 66 percent of enterprises in the investment climate survey reported having an overdraft facility, compared with only 18 percent of enterprises in China and 23 percent in Pakistan (figure 2.22). As discussed in chapter 3, however, this figure obscures serious weaknesses and looming problems in the financial sector that could hurt long-term growth. Lagging in Human Resources Bangladesh has improved access to education, essential in creating a workforce with the skills and knowledge needed for a healthy investment climate. But other elements for a strong human capital base are missing. Fewer scientists and engineers are available than in many other developing countries, including many of the comparator countries in East and South Asia. Illiteracy remains high, possibly reflecting poor education results in the 1970s and 1980s. And concerns about the quality of education remain.
Bangladesh has made much progress in improving enrollment over the past decade. In 1990 its gross enrollment ratiosonly 72 percent for primary, 19 percent for secondary, and 4 percent for tertiary educationwere similar to their levels in 1975 and lower than the average ratios in low-income countries (89 percent, 37 percent, and 6 percent). Moreover, its ratios were lower than those in any of the comparator countries in East and South Asia except Pakistan, which had lower primary and tertiary ratios. By the late 1990s Bangladesh had increased its gross primary enrollment ratio to more than 97 percent and its gross secondary enrollment ratio to 42 percent (figure 2.23). These ratios exceeded the average in low-income countries. Tertiary enrollment remained low, however, rising to about 5 percent by the end of the decade. Despite these improvements, illiteracy remains relatively high in Bangladesh. At 58 percent, the rate is higher than that in any of the comparator countries in East and South Asia and slightly higher than the average for low-income countries (46 percent). The slower progress in this indicator reflects the fact that it
25
Figure 2.23. Illiteracy Rate and Gross Secondary and Tertiary Enrollment Ratios in Bangladesh Enrollment F gure 2.23. Illiteracy Rate and Gross Secondary and Tertiary and Comparator Countries Ratios in Bangladesh and Comparator Countries
Percent 100 80 60 40 20 0
b In do ne sia a w & m in id co dl me e a In di aa in es b an a me a in a ad es ka a , la ai Th ist in co Ch ng l Pa k Ma l an pp ay sia h nd
iL Sr
Ba
Lo
Secondary Enrollment
Lo
Tertiary Enrollment
Ph
ili
India Sri Lanka
Illiteracy
a. No data available on tertiary enrollment. b. Enrollment data are for 1998/99. Source: World Bank and United Nations Educational, Scientific, and Cultural Organization (UNESCO).
is easier to raise enrollment than to quickly reduce illiteracy among adults. Moreover, the quality of education has not kept pace with enrollment. During grassroots consultations for the 2003 Interim Poverty Reduction Strategy Paper, rural participants expressed concerns about teacher absenteeism, the poor quality of teachers, and inadequate learning materials (Bangladesh 2003). Still another concern is the shortage of skilled workers. Business executives, asked to rate the availability of scientists and engineers in their country in the survey for Global Competitiveness Report 2001/02, ranked Bangladesh 58th among the 75 countries in the survey, ahead of China (59th) and Malaysia (60th) but below the other comparator countries (figure 2.24). The relatively low ranking might reflect in part the relatively low tertiary enrollment ratio in Bangladesh. But it might also reflect a brain drain of skilled workers. When asked whether scientists and engineers normally wished to leave the country to pursue opportunities elsewhere
or would almost always remain in the country, executives in Bangladesh were more likely than those in all other countries in the survey except Zimbabwe
Figure 2.24. Rankings of Bangladesh and Comparator Rankings of Bangladesh and Comparator Figure 2.24. Countries by Availability of Scientistsby Availability of Scientists and Engineers Countries and Engineers
Indonesia Philippines Thailand China Malaysia Bangladesh 0 Strongest 10 20 30 40 50 60 70
Likelihood scientists and engineers will leave country Availability of scientists and engineers
Weakest
Source: World Economic Forum 2002.
26
to report that scientists and engineers would normally leave the country. A Weak Record in Technological Innovation Bangladesh spends less on research and development (R&D) as a share of GDP than do most other developing countries in East and South Asia for which data are available (figure 2.25). While R&D spending totaled about 0.03 percent of GDP in Bangladesh, it amounted to about 0.2 percent of GDP in the Philippines and Malaysia and about 0.7 percent in China and India. Since R&D spending as a share of GDP is highly correlated with income, the low spending in Bangladesh might reflect its low per capita income relative to that in most comparator countries. But it might also reflect problems in the institutional environment: recent work has shown that R&D spending tends to be lower in countries where intellectual property rights are less well protected and the rule of law is weak (Clarke 2001). The low level of R&D spending in Bangladesh is reflected in relatively low levels for other measures of innovation. For example, companies and individuals in Bangladesh were granted fewer U.S. patents per
Figure 2.26. Scientific Articles Published and Figure 2.26. Scientific Articles Published and U.S. Patents U.S. Patents Received Per Million People in Received Per Million People in Bangladesh and Comparator Bangladesh and Comparator Countries Countries
20
16.7
16 12 8 4
1.0 3.5 0.0 0.6 0.2 1.9 0.1 1.9 1.6 0.5 7.2 4.0 1.5 8.2 9.0
15.2
1.8
Bangladesh
Pakistan
Philippines
Sri Lanka
Thailand
China
Indonesia
Scientific articles
Utility patents (X 10)
Note: Patent data refer to patents for inventions filed with the U.S. Patent and Trademark Office. Source: National Science Foundation and U.S. Patent and Trademark Office.
Figure 2.25. Research and Development Spending asResearch and of GDP in Spending as a a Share Development Bangladesh Figure 2.25. and Comparator Countries, LatestCountries, Share of GDP in Bangladesh and Comparator Year Latest Year Available Available
Percent 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00
nd h in es na ia ad es In do ne s ng l ili pp Th ai Ma la Ch i In di a ia la ys
capita than were those in other developing countries in East and South Asia. Similarly, basic research appears to be weaker in Bangladesh than in other countries in the region: authors from Bangladesh published fewer scientific articles per capita than did those from any of the comparator countries in East and South Asia except Indonesia (figure 2.26).
Notes 1. Bruno and Easterly (1998) find little evidence to support the assertion that inflation affects growth, however, even when it reaches levels between 20 and 40 percent. As discussed in detail in Recanatini, Wallsten, and Xu (2000), averaging responses on qualitative surveys can be problematic for several reasons. Lall (2001) discusses other problems with the Global Competitiveness Report.
2.
Source: United Nations Educational, Scientific, and Cultural Organization (UNESCO).
Ba
Ph
Malaysia
India
27
3.
4.
5.
The ranking was on a five-point scale, with 0 implying that infrastructure services posed no obstacle and 5 implying that they posed a very severe obstacle. To avoid problems associated with averaging subjective answers, the number of enterprises reporting that infrastructure was no obstacle is presented. The survey asked firms about ports and customs simultaneously, so it is impossible to determine whether the delays are caused primarily by the port or by customs. But this approach is necessary because entrepreneurs typically know only the total delay, not who is responsible for the delay. Future surveys should experiment with ways of eliciting information on ports and customs separately. Some qualifications should be noted when using subjective indicators to compare competitive environments. One issue is the yardstick that respondents (usually enterprise managers or outside experts) use when assessing the quality of the business environment. One problem is the
point of reference: if respondents use different yardsticks across countries, their answers may not be comparable. In one study, for example, entrepreneurs in the Republic of Korea rated problems consistently worse than entrepreneurs in Indonesia. Few would believe the business environment in Indonesia to be superior to that in Korea. A more plausible explanation is that Korean entrepreneurs had higher expectations about service delivery. Another problem is that these measures generally change only very slowly over time and therefore might not fully reflect recent improvements. Finally, respondents might lack in-depth knowledge of the business environment in other countries, making it difficult to assess the relative quality of the business environment in their own country, even using a specific benchmark. Because of these concerns, these indicators are often thought to be more useful for comparing problems within a country than between countries.
The Effects of Bangladeshs Investment Climate on Firms
28
3. The Effects of Bangladeshs Investment Climate on Firms Comparing Bangladesh with other countries provides important insights, pointing to areas where Bangladesh has made greater strides than its neighbors as well as to areas where it has lagged behind. But understanding why these differences have emerged requires more detailed information. Using the survey of firms in Bangladesh, this chapter explores the investment climate at the firm level, looking for the biggest problems in the investment climate and quantifying their effects on firm growth. Along with deficiencies in infrastructure, corruption appears to be the dominant problem facing firms, occurring at nearly every point of contact between firms and the government (customs, inspectors, state-owned utilities). These issues pose special challenges to small and medium-size firms, which devote more of their resources to informal payments and dealing with government inspections than do large firms. International IntegrationThe Potential of Exports and the Rise of a New Industry The potential benefits of international integration can be clearly seen at the firm level in Bangladesh: firms that export tend to enjoy faster sales and employment growth and higher investment than firms that do not (figure 3.1). Yet this raises an important question about the direction of causality: exporting may help improve firms performance, but it may also be true that better firms choose to export. The Bangladesh data make it possible to begin to address this question. To do so requires first selecting firms in the sample that had never exported five years previously (477 of the 1,001 firms).1 These firms are then divided into two groups: firms that began to export sometime in the previous five years (71 firms) and those that did not (406). The
Figure 3.1. Three-Year Average Performance Measures for Firms Average Performance Measures Figure 3.1. Three-Year in Bangladesh by Export Status in Bangladesh by Export Status for Firms
Percent 14 12 10 8 6 4 2 0 Sales growth Employment growth Investment rate Exporters Nonexporters
second step allows a comparison of the performance of firms that began to export with the performance of nonexporters. The analysis shows that firms that began exporting for the first time within the previous five years had faster sales and employment growthand higher investmentthan the firms that did not begin to export (figure 3.2; see appendix 2 for the regression results and a discussion of the methodology used). But these results still do not answer the question of whether the better firms chose (or were able) to export. While there is little information on the firms in years before the survey, the survey did request data on firms sales in 1996/97the last year in which all the firms in this subsample had not yet exported.2 These early sales figures can thus be compared to get an idea of which firms began to export. The data suggest that bigger firms (in terms of sales) tended to remain nonexporters while the smaller firms turned to exports. Firms that began exporting within the previous five years were smaller
29
Figure 3.2. Three-Year Average Performance Measures for New Exporters and Measures Figure 3.2. Three-Year Average Performance Nonexporters in Bangladesh Bangladesh for New Exporters and Nonexporters in
Percent 17.0 New exporters 12.75 Nonexporters
Figure 3.3. Sales by New Exporters and Nonexporters in Sales by New Exporters and Figure 3.3. Nonexporters in Bangladesh Bangladesh
Thousands of taka 250 New exporters Nonexporters
200
150 8.50
100
4.25
50
0 Sales growth Employment growth Investment
0 199697 Source: Investment climate survey. 200102
in 1996/97 on average than those that remained oriented purely toward the domestic market (figure 3.3). But by the year of the survey the new exporters had overtaken the nonexporters in sales. These results show the potential benefits from exporting. But they also hide an important development in the Bangladesh economy. While the regressions control for industry fixed effects, the analysis also picks up the growth of the ready-made garment industrya new success story in Bangladesh (the empirical results are robust even when the garment industry is excluded, however). The firms that never exported are primarily in the textiles, food and food processing, and electronics industries. By contrast, the new exporters are mainly in the ready-made garment industry. Indeed, firms in this industry tend to be the youngest in the sample and by far the most likely to export. Thus the results reflect the development of a new industry that has used an export-led growth strategy to become an important force in the Bangladesh economy (box 3.1).
Governance a Big Burden on Firms Governance has direct effects on firms through the regulatory and administrative procedures affecting day-to-day operationsand, often, through the corruption that can accompany these procedures. The survey made several attempts to uncover information about administrative hassles and corruption in Bangladesh. As might be expected, questions on these topics are the ones that firms are least likely to answerand least likely to respond to truthfully when they do answer (see Recanatini, Wallsten, and Xu 2000 for a survey of the survey literature). Nonetheless, the survey collected information on several issues relating to firms interactions with the government. The data provide a sense of the burden that governance problems impose on firms. Regulation How large is the regulatory burden faced by Bangladesh firms? One way to find out is to ask firms how many visits they receive from inspectors from government agencies. The answer: about 17 visits a
30
Box 3.1. The Bangladesh Ready-Made Garment IndustryGreat Success and Great Challenges
The ready-made garment industry accounts for the largest number of firms in the Bangladesh investment climate survey. This sector has achieved much success in the past decade, with especially rapid export growth in the first half of the 1990s. Both the sectors success and the challenges ahead make it an interesting and important case for Bangladesh. The sectors success in the 1990s can be traced in part to the Multifibre Arrangement, which has regulated international trade in garments with a system of quotas for several decades. In the early 1990s successful garment manufacturers from such countries as the Republic of Korea were looking for countries with unused quotas that
Average Productivity, Capital Intensity, and Wages in Garment Factories in Bangladesh and China
Thousands of US$ China 6
4 Bangladesh 2
0 Annual value added per worker Capital per worker Annual wages
Source: Investment climate surveys
could be used for exports to the United States and Europe. Bangladesh was one such country. It has other advantages as well. It has a high-quality, low-cost labor force. And it has shown itself willing to make changes to meet compliance norms and standards set by buyers in the United States and EuropeBangladesh was the first developing country to sign an agreement to eliminate child labor from its garment factories. Despite these advantages, the Bangladesh garment sector has been losing out in competition with China in recent years. And the end of the Multifibre Arrangement by December 2004 will bring even greater competition in the global garment market. Data from the investment climate surveys help explain why Chinas share of this market is growing. The typical Chinese garment factory uses much more capital per worker and pays higher wages than its Bangladesh counterpart (see figure). It also has far higher labor productivity. So even after the higher wages and greater capital use are taken into account, the typical Chinese factory is much more profitable. Some of these differences between Bangladesh and Chinese garment factories relate to differences in the investment climate: Chinese factories can count on more reliable power, easier access to phone lines and other infrastructure, and more efficient ports and customs. So the looming end of the Multifibre Arrangement makes it even more imperative for Bangladesh to address deficiencies in its investment climate.
year from all government agencies (figure 3.4). The most frequent visits came from the customs agency (7.5 a year) and the tax agency (2.7).3 Dealing with these visits can be costlynot only in fees and payments but also in the resources firms must expend to satisfy inspections. Managers reported spending nearly 5 percent of their time on average dealing with regulatory matters. With a reported average compensation for managers of around 1 million taka, that means that the management cost alone amounts to close to 50,000
taka annually. And more than a third of firms reported using facilitators to help with regulatory issues, at an average annual cost of more than 600,000 taka. The excessive bureaucracy dampens firms performance. To explore the effect of government visits, the number of inspections were estimated per firm employee to normalize inspections by firm size, since more inspections are both to be expected and easier to handle for larger firms. Regression analysis was then carried out, controlling for industry fixed effects and firm characteristics. The results show that
31
Figure 3.4. Average Annual Visits by Government Average Annual Visits by Figure 3.4. Government Agencies to Firms in Bangladesh Agencies to Firms in Bangladesh
20 18 16 14 12 10 8 6 4 2 0 Customs Tax Inspectorate Labor & Social Security Fire & Building Safety Total, all agencies
Figure 3.5. Average UnofficialinPayments in Figure 3.5. Average Unofficial Payments Previous Year by Firms in Year by Previous Bangladesh Firms in Bangladesh
Thousands of taka 80 70 60 50 40 30 20 10 0 To government inspectors For utility connections In ports & customs Total, all unofficial payments
Note: Total does not equal sum of the categories because not all firms paid all types of bribes. Source: Investment climate survey.
the number of inspections per employee has a significant negative correlation with investment and productivity.4 Corruption A large regulatory burden often means corruption with inspectors and other officials demanding paymentsand indeed, more than half of all firms in the sample reported that corruption was either a major or very severe obstacle to their growth. So while gathering reliable information on corruption is difficultunderstandably, since firms may be reluctant to provide itfirms in Bangladesh clearly view corruption as a significant problem. Firms reported making unofficial payments totaling an average of more than 70,000 taka in the previous year (figure 3.5). But given firms reluctance to answer detailed questions on payments and their qualitative responses about the severity of corruption, this number and others on unofficial payments probably understate the problem. Moreover, the totals disguise much variation among agencies.
A breakdown by government agency of the average unofficial payments, and the number of firms reporting making payments, gives a sense of how common it is for firms to be required to make unofficial payments to agenciesand how large those payments are (figure 3.6). The customs and tax agencies top the list, both in the frequency with which firms reported making payments to them and in the payments required. Some 424 firms reported making unofficial payments to the customs agency in the previous yearpayments averaging more than 55,000 taka. And 517 firms reported paying the tax authorities close to 20,000 taka on average.5 By contrast, only 154 firms claimed payments to environmental agencies, averaging 4,800 taka, while 331 firms reported payments to the labor and social security agencies, for about 4,500 taka. The average payments for infrastructure connections also disguise variation. While a relatively small number of firms (54) reported making unofficial payments to the gas company for connections, the payments were very largeaveraging close to
32
Figure 3.6. Average Unofficial Payments to Government Agencies in Payments to Government Figure 3.6. Average Unofficial Previous Year by Firms in Bangladesh by Firms in Bangladesh Agencies in Previous Year
Thousands of taka 60 50 40 30 20 10 (154) (331) 0
m r & ent S Fir Sec oci e ur al & i bl ty dg sa wo Foo rk d h fety pl y ac gi e en sa e fe & Sa ty ni ta tio Co n ns tru ct io n
Figure 3.7. Average Unofficial PaymentsPayments for Average Unofficial for Utility F gure 3.7. Utility Connections by Firms in Bangladesh Connections by Firms in Bangladesh
Thousands of taka 100 (54)
(424) 80
60
40 (517) 20 0 (295) (85) (116) (47) Gas
(103) (241)
Electricity
Mainline telephone
In sp
En
vi
Note: Figures in parentheses are the number of firms reporting making payments. Source: Investment climate survey.
om s st
to
ra t
Ta x
La
bo
ro n
Cu
ec
Note: Figures in parentheses are the number of firms reporting making payments. Source: Investment climate survey.
100,000 taka for a connection (figure 3.7). Next largest were unofficial payments for electricity connections, at nearly 30,000 takareported by 103 firms. Some 241 firms reported paying an average of 11,000 taka for a mainline telephone connection. Of course, obtaining a connection to a service is a rare event. Thus the small share of firms reporting payments for connections probably reflects the fact that most firms in the sample already have connections, not that unofficial payments for connections are rare. For new entrepreneurs problems in obtaining new connections may hamper not only their growth but also their entry into the market. Legal System Entrepreneurs and other investors want assurances that contracts will be honored, that disputes will be handled fairly and quickly by the legal system, and
that its decisions will be enforced. Thus a countrys legal system can support investmentor seriously undermine it. Firms in Bangladesh generally have a poor view of the court system. Asked for their perceptions on whether the court system is fair, honest, quick, affordable, and consistent and whether it enforces its decisions, firms scored it best on fairness and honestythough even here nearly a third reported that it was never or seldom fair or honest (figure 3.8). The worst score goes to efficiency, with more than 60 percent of firms reporting that courts are never or seldom quick. Even worse, nearly 70 percent of firms involved in a court fight in the previous three years reported that the courts were never or seldom quick, suggesting that the efficiency of the court system may be even worse than it is perceived to be.6 Access to Finance a Growing Concern Firms in Bangladesh reported that around 55 percent of their working capital and nearly 60 percent of their investment capital, on average, came from retained
33
Figure 3.8. Share of Firms in Bangladesh Believing That Figure 3.8. Share of Firms in Bangladesh Believing That Court System Never Court System Never or Seldom... or Seldom...
Percent 60 50 40 30 20 10 0
le r ui ck isi on s nt Is fa i sd ec Is ho ne s rd ab Is q on sis ffo te t
Is a
Is c
earnings, while about 30 percent of working and investment capital came from banks. Just over 65 percent of firms have an overdraft facility or line of credit. A line of credit can be useful, allowing firms to borrow funds relatively quickly and easily, without excessive bureaucracy. Firms that have lines of credit appear to use them extensively: the median share of lines of credit remaining unused was only 10 percent. How does access to formal finance affect firms performance? To investigate the effects, an index was constructed based on the share of a firms working capital that comes from banks (domestic and foreign), the share of a firms new investment capital from banks, and whether the firm has access to an overdraft facility or line of credit. The index thus increases with a firms access to formal finance and decreases with reliance on retained earnings. Regressions show that the index is positively and significantly correlated with growth in employments, suggesting that firms with better access to credit grow more quickly than firms that rely more on
En
fo rc e
retained earnings, even controlling for firm and industry characteristics. That firms with better access to finance perform better is perhaps axiomatic. But there is cause for concern in Bangladesh. While 66 percent of firms reported having an overdraft facility or line of credit, a large share of these firmsnearly 60 percenthad exhausted that credit (figure 3.9). Moreover, the survey data focus on short-term lending, and other evidence suggests problems with term lending. Consider national-level data on nonperforming loans. Some estimates put the share of nonperforming industrial loans at around 40 percent (Centre for Policy Dialogue 2001).7 Since banks will have to provision for nonperforming loans, the large share of such loans could ultimately increase the cost of capital to entrepreneurs. While the government has taken measures to improve the banking sector, including strengthening debt recovery and enhancing monitoring capacity, dealing with the high level of nonperforming loans remains difficult.
34
Figure 3.9. Firms in Bangladesh by Share of Credit Line Used 3.9. Firms in Bangladesh by Share of Credit Line Used Figure
Share of firms 0.60
Share of credit line used
100
Flexible Rules for Labor Few firms in Bangladesh believe that labor issues impede their growth. Indeed, asked what ideal staffing levels would be if hiring and firing were costless, the median firm reported that its current staffing level was ideal. Including extreme values makes little difference: on average firms reported that their ideal staffing level was less than 2 percent smaller than its current level. Nonetheless, two issues relating to labor are worth emphasizing. The first has to do with labor flexibility. To operate efficiently, firms need a labor force that can quickly adjust to production needs. Regressions controlling for industry and firm characteristics show that the share of a companys labor that is temporary (rather than permanent) is positively correlated with sales and employment growth. That is, firms that can adjust their staffing levels more quickly seem to grow more quickly. But assigning causality here is difficult: it may be that firms hire temporary labor because they are growing so quickly, not that firms grow more quickly because they use temporary labor.
This discussion leads to the second issue: the benefits of temporary labor should not be interpreted to mean that investments in workers are not useful. Regressions similar to those for labor flexibility show that firms that ran training programs or sent employees to outside training programs saw higher sales growth, profitability, and investment.8 Together, the two analyses suggest that flexible rules on hiring and firing benefit firms, but so too do investments in workers. Just as firms with a flexible labor force tend to grow faster, so do firms that invest in their labor force through training. Greater Difficulties for Small- and MediumSize Enterprises Small- and medium-size enterprises often face greater difficulties than large firms. If these difficultiesor market failuresprevent them from growing, the consequences can prove damaging to the economy: dynamic new firms will never emerge to challenge less efficient, but perhaps much larger, incumbents.
35
But identifying problems facing small firms is not easy. The difficulty arises because in a healthy economy very few new firms will succeed in the long run. So, on average, small firms often appear to perform worse and to face greater difficulties than large firms, but that does not necessarily mean that small firms face special market failures. Consider access to finance. Small firms across the world often report difficulty obtaining finance. In some cases this difficulty reflects market failures that create credit constraints for small firms even when their future would otherwise be promising. In other cases new firms have trouble obtaining financing because they are not viable. Sorting out which explanation applies is extremely difficult. Nonetheless, looking at differences in investment climate measures between smaller and larger firms provides insight into the difficulties entrepreneurs face, both in building a firm that they have already started and in deciding whether to start a new firm. To investigate these differences, the sample of firms was divided into three groups by size of employment. With nearly all firms (988) reporting employment for 2002, this division resulted in the following groups: 218 firms with up to 50 employees, 215 with 51150 employees, and 554 with more than 150. Now lets look at the differences among these groups in their experience with finance, regulation, and corruption. First consider how firms fund new investments. According to the survey data, larger firms are much more likely to use bank loans to finance new investments such as land, buildings, machinery, and equipment (figure 3.10). But formal finance goes beyond bank loans. To capture more broadly the extent to which a firm has access to formal finance, an index was constructed based on the share of a firms working capital and investment that comes from bank loans and whether the firm has an overdraft facility (see appendix 2 for details). The results show that small firms generally have much worse access to formal finance than do
Figure 3.10. Share of New Investments Funded3.10.Bank of New Investments Funded by Bank Figure by Share Loans in Bangladesh, by Firm sizeBangladesh, by Firm Size Loans in
Percent 35 30.5% 30 25 20 15 10 5 0 < = 50 51150 Firms by number of employees Source: Investment climate survey. > 150 18.4% 34.0%
larger firms (figure 3.11). As noted, however, it is difficult to determine the extent to which this difference reflects market failures. That larger firms
Figure 3.11. Access to Formal Finance by Figure 3.11. Access to Formal Finance by Firm Size, Firm Size, Bangladesh Bangladesh
Finance index Worse ..........................................Better
51150
> 150
< = 50 Firms by number of employees Source: Authors' calculations based on investment climate survey data.
36
have better access to formal finance could simply mean that better firms have better access to finance and thus become larger. Whichever effect dominates, the results provide compelling evidence that smaller firms face more difficulties in gaining access to formal finance. Indicators that are more exogenous to the firm are easier to interpret. Two such indicators relate to regulation and corruption. Comparing government inspections per employee across the three size categories reveals that smaller firms face a larger burden of inspections. Indeed, the smallest firms face nearly 10 times the inspection intensity that large firms do (figure 3.12). Inspections per employee may overstate the problem facing small firms: when a firm is very small, even one inspection can make this measure seem large. Nonetheless, the indicator shows the bureaucratic obstacles entrepreneurs facea very small firm has fewer employees to deal with inspectors and must divert scarce resources to meet bureaucratic requirements.
Corruption, though ubiquitous in Bangladesh, can also disproportionately affect small firms. When bribes are measured as a share of costs by firm size, the results show that the smallest firms tend to make unofficial payments at nearly five times the level of payments by large firms (figure 3.13). Since these younger, smaller firms are also more likely to face financial constraints, these unofficial payments make growth even more difficult. The bottom line: life is more difficult for small firms. Some of these difficulties arise simply because not all firms are viableas noted, in a healthy economy most new, small firms will fail. But a healthy economy should encourage entrepreneurial risk taking and attempt to minimize market failures facing small enterprises. The evidence here suggests instead that small enterprises in Bangladesh face greater obstacles than other firms doobstacles that cannot be explained as markets working efficiently. These obstacles ultimately prevent dynamic new firms from entering the market and putting competitive pressure on existing enterprises.
Figure 3.12. Annual Government Visits per Employee by Annual Government Visits per Figure 3.12. Employee by Firm Size in Bangladesh Firm Size in Bangladesh
Visits 0.25
Figure 3.13. Bribes as a as a of Total CostsTotal Costs Figure 3.13. Bribes Share Share of by Firm bySize in Bangladesh Bangladesh Firm Size in
Percent 2
0.20
0.15
0.10
0.5
0 < = 50 51150 Firms by number of employees Source: Investment climate survey. > 150
0 < = 50 51150 Firms by number of employees Source: Investment climate survey. > 150
37
Comparing the Investment Climates in Chittagong and Dhaka Comparing the investment climates in Chittagong and Dhaka produces intriguing results: Dhaka has a better investment climate in some respects, while Chittagong comes out on top in others. And while some investment climate measures differ little between the cities, others differ a great deal. What explains these results? Lets look at the evidence. First consider the differences in firms performance between the cities. Firms in Dhaka appear to be growing more quickly, with faster sales and employment growth and a higher investment rate on average (figure 3.14). But firms in Chittagong are more productive and more profitable (figure 3.15).9 Infrastructure Firms in the two cities have similar opinions of the degree to which the electricity sector poses an obstacle to their growth and development, with the problem in Dhaka appearing to be slightly worse (figure 3.16). But firms in Dhaka were far more likely to
Figure 3.15. Profitability and Productivity in Chittagong Figure 3.15. Profitability and Productivity in Chittagong and Dhaka and Dhaka
Percent 43
Chittagong Dhaka
1.4
Pretax profitability
Total factor productivity
report that telecommunications and transport were a major or very severe problem. Objective measures confirm these results. Firms in the two cities reported nearly identical problems with the quality of electricity, for example, with firms in Chittagong experiencing power interruptions 247 days a year and firms in Dhaka reporting interruptions
Figure 3.14. Firm Growth in Chittagong and Dhaka 3.14. Firm Growth in Chittagong and Dhaka Figure
Percent 12 Dhaka Chittagong
Figure 3.16. Share of Firms Rating Infrastructure as a Major or Severe Obstacle Figure 3.16. Share of Firms Rating Infrastructure as a in Major or Severe Obstacle in Chittagong and Dhaka Chittagong and Dhaka
Percent 74
Dhaka Chittagong
0 Sales growth Employment growth Investment rate 0 Electricity Transport Telecommunications Source: Investment climate survey.
38
250 days a yearstatistically identical responses. Similarly, firms in Dhaka reported losing 3.3 percent of their output to power problems, while firms in Chittagong reported losing 3.0 percent of their output. But the similarities disappear when it comes to waiting times for connections. Firms in Chittagong reported far shorter median waits for both mainline telephone and electricity connections than did firms in Dhaka (figure 3.17).10 Thus the data suggest that while the quality of infrastructure may be similar in the two cities, firms in Dhaka see infrastructure as a bigger obstacle. This perception is confirmed by the generally much longer waits that firms in Dhaka must endure to obtain utility connections. But not all infrastructure measures are better in Chittagong. While physical infrastructure is extremely important, so too is soft infrastructuresuch as finance, technology, and labor. Here, Dhaka appears to outperform Chittagong. On average, firms in Dhaka have better access to formal finance, use technology more intensively, and provide more training for their workers than do firms in Chittagong (figure 3.18).
Figure 3.18. Finance, Technology, and Worker Figure 3.18. Finance, Technology, and Worker Training by City by City in and Dhaka Training in Chittagong Chittagong and Dhaka
Percent
29
Dhaka Chittagong
Share of firms with worker training
18 Finance index
Technology index
Source: Authors' calculations based on investment climate survey data.
Figure 3.17. Median Waits for Electricity and Mainline3.17. Median Waits for Electricity and Mainline Figure Telephone Connections Chittagong and DhakaConnections Chittagong and Dhaka Telephone
Days 100 90 80 70 60 50 40 30 20 10 0 Electricity Source: Investment climate survey. Mainline telephone Chittagong Dhaka
Regulation and Corruption Regulation and corruption, shown by the firm-level analyses to be a severe obstacle, affect firms in the two cities quite differently. Firms in Dhaka are more likely than those in Chittagong to view tax administration, customs administration, and corruption as major or very severe obstacles to their growth (figure 3.19). Again, objective measures back up firms perceptions. Top managers of firms in Dhaka spend a greater share of their time dealing with government regulations than do those in Chittagong (figure 3.20). And firms in Dhaka tend to pay more bribes per employee. Thus firms in Chittagong appear to face fewer regulatory hassles and less corruption (though they are still certainly problems) than do firms in Dhaka. Whats the Bottom Line? The comparison leads to no clear conclusion that one city has a better investment climate than the other. The survey seems to tell us that regulation, corruption, and some aspects of physical infrastructure pose smaller problems in Chittagong, while access to finance and technology appears to be better in
39
Figure 3.19. Share of Firms Reporting Governance and Corruption as a Major or Figure 3.19. Share of Firms Reporting Governance and Very SevereaObstacle in Chittagong and Corruption as Major or Very Severe Obstacle in Dhaka Chittagong and Dhaka
Percent 63 Dhaka
Figure 3.20. Burden of Regulation and Corruption in Figure 3.20. Burden of Regulation and Chittagong in Dhaka Corruption and Chittagong and Dhaka
Percent 5.0
Share of time spent dealing with regulations
Taka Dhaka 900
Chittagong
Chittagong
0 Customs administration Tax administration Corruption
0 Time spent dealing with regulations Source: Investment climate survey. Unofficial payments per employee
Dhaka. And it shows that firms are growing more quickly in Dhaka, but those in Chittagong are more profitable and productive. At least two hypotheses could explain these results. First, suppose that all the survey data accurately reflect reality. In this case the explanation could be this: The greater access to finance, use of technology, and worker training in Dhaka are conducive to growth for firms. But this success attracts greater corruption, cutting into firms profits and productivity. In other words, firms may benefit from being in Dhaka because of proximity to other firms (a cluster effect that in turn attracts more firms) and government agencies. These benefits, though, appear to come with a costgreater corruption, more regulatory hassles, and longer waits for utility connections. Second, suppose that some aspects of the data are suspect. Assume that the corruption measures reflect reality and that firms in Dhaka are subject to higher levels of unofficial payments than are firms in Chittagong. While firms are always (and understandably) reluctant to reveal financial information, firms facing greater corruption may be even more
reluctant to do so. That is, the greater the corruption, the greater the incentive for firms to hide profits from bribe-takers. So, because corruption is a greater problem in Dhaka, firms in that city have an incentive to report lower profits on average. If this incentive spilled over into tax reporting, corruption would in effect cause a drain on the treasury. This hypothesis is consistent with results in Friedman and others (2000) suggesting that overregulation tends to drive economic activity from the formal to the informal sector. Simulating the Gains from a Better Investment Climate What kind of gains might firms expect from significant improvements in the investment climate? To investigate this question, simulations were conducted using the results of the empirical analyses discussed in this chapter. Such simulations should be taken with a grain of salt: they have a large margin of error and, more important, provide no guidance on how to achieve the improvements they require. Nonetheless,
40
the simulations shed light on what firmsand thus the countrystand to gain if such improvements could be made. The simulations assumed a 50 percent improvement in the investment climate measures that proved to be significant in a regression that estimates many of these measures together (see appendix 2). In other words, they estimated the impact of reducing by half the number of days with power interruptions, delays in ports and customs, bribes as a share of costs, and the number of inspections per employee, and increasing by half the share of firms that export, access to technology, and access to finance. A 50 percent improvement may sound farfetched. But such a change would still leave firms in Bangladesh with less reliable electricity and longer waits in customs than firms in China endure (see chapter 2). What do the simulation results show? The improvements in the investment climate could boost average sales growth from about 7 percent to more than 10 percent, raise the investment rate from about
9.5 percent to 12 percent, and more than double total factor productivity (figure 3.21). As noted, these estimates should be interpreted with great caution. The estimated productivity improvements, for example, seem quite high. Nonetheless, they suggest how much weaknesses in the investment climate are holding back economic growth in Bangladesh. And they show that strengthening infrastructure, improving regulation, and reducing corruption could dramatically improve growth.
Notes 1. 2. This selection procedure also removes firms established five or fewer years before the survey. The survey also requested sales data for 1991/92, but many firms in the sample had not yet been founded in that year and others could not recall data from a decade earlier. These data therefore are not used in this analysis, as it would severely restrict the sample size. Several agencies do not appear in the figure. The data for the separate agencies do not sum to the total, since the survey could not ask about all agencies that conduct inspections. Inspections per employee are also negatively correlated with sales growth and profitability, but these estimates are not statistically significant. It is important to note that endogeneity is an especially serious problem in regressions involving inspections or bribes as the policy variable of interest. While onerous inspections are likely to dampen firm performance, it is also true that a firm will have more interactions with the government as the firm expands and thus needs permits for its expansion and investment plans. In this scenario the number of inspections and firm performance would be positively correlated, but not because inspections cause firm growth. In
F gure 3.21. Investment Climate Measures Selected Estimated Gains from Improving Selected Investment Climate Measures in Bangladesh
0.12
Figure 3.21. Estimated Gains from Improving in Bangladesh
3.
4.
0.10 0.08 0.06 0.04 0.02 0 Sales growth Investment rate Total factor productivity (x10) Actual Potential
Note: Estimates calculated assuming a 50 percent improvement in the measures that proved to be statistically significant in regression analysis (see appendix 2). Source: Authors' calculations based on investment climate survey data.
41
5.
another scenario bribes could be correlated with better firm performance if bribe-seekers are attracted to firms that are profitable, as these firms may be more willing and able to provide bribes. Here, a regression would also reveal a positive correlation between bribes and firm performance, but because profits attracted bribe-takers, not because bribes caused growth. The implication is that the regressions are likely to be biased toward finding positive correlations between regulatory hassles and firm performance. That the regressions yield negative correlations suggests that the true negative association between inspections and performance is likely to be much greater than estimated here. In a separate set of questions 533 firms reported making unofficial payments averaging more than 29,000 taka between the arrival of their goods at the port and the goods clearance by customs.
But the nature of the question makes it impossible to determine whether these payments are in addition to those that firms reported making directly to the customs agency or whether the payments overlap. 6. Other scores for the courts remained essentially the same for firms that had been involved in a court fight. 7. State enterprises held 49 percent, and private borrowers 51 percent, of total outstanding loans in June 2000. 8. Employment growth was positive as well, but it was not statistically significant. 9. This result is not due to outliers: removing outliers and using medians yields the same result. 10. Firms in Dhaka also reported longer waits for gas connections, but the number of firms in the sample that requested connections in Chittagong in the previous two years was too small to allow significant comparisons.
Conclusions and Policy Recommendations
42
4. Conclusions and Policy Recommendations This report points to several features of the investment climate in Bangladesh that require urgent attention if the country is to grow more quickly: physical infrastructure, governance, and the financial system (ordered loosely by importance). Small- and mediumsize enterprises have suffered more from the deficiencies in these areas than large companies. At the same time, companies able to export have performed better than companies that do not export. Yet without meaningful reforms in infrastructure, governance, and finance, entering the export market will be difficult for small- and medium-size enterprises. Moreover, the situation will worsen as the Multifibre Arrangement is phased out by December 2004 and Bangladesh loses advantages that have helped ease the pressure imposed on firms by the poor investment climate. The Interim Poverty Reduction Strategy Paper has already identified infrastructure, governance and corruption, and finance as issues requiring attention. Yet the acuteness of the problems affecting the private sectors performance and competitiveness suggests that in many areas the government may need to consider a more profound agenda of reform. Easing Bottlenecks in Infrastructure Power tops the list of infrastructure concerns in Bangladesh. But reforms in telecommunications, transport, and ports and customs will also be critical to ease the bottlenecks hampering private enterprise in Bangladesh. Power The power sector has seen some improvements in the past two years: Two new independent power plants, with a capacity of 810 megawatts, have come onstream, expanding generation capacity by about 20 percent and improving the reliability of supply (table 4.1). System
losses have fallen from 35 percent to 30 percent, and revenue collection has increased from 91 percent of billed electricity to 98 percent. And two tariff adjustments since early 2002 have increased cost recovery and reduced cross-subsidies from firms to residential consumers. But despite these recent improvements, firms continue to face high costs from power outagesand long waits for new connections continue to delay the entry of new firms. Moreover, the sector is bankrupt, imposing a big drain on scarce fiscal resources (World Bank 2002a). A radical and systematic restructuring to eliminate remaining inefficiencies would allow the sector to fulfill its role in development, with both more confidence and greater sustainability. Indeed, the sector can play an important role: the country has sufficient energy resources (mainly natural gas), and these resources can be converted into electricity more competitively than many of its neighbors and peers can generate electricity. Key elements of a sector restructuring plan would include improving sector and enterprise governance, undertaking financial restructuring, introducing independent regulation, and phasing in competition. The current administration has tacitly endorsed the Vision and Policy Statements on Power Sector Reforms (2000), which supports unbundling the sector and encouraging private participation. Transmission and dispatch functions and assets have been transferred to the Power Grid Corporation of Bangladesh, and a few generation and distribution companies are being corporatized. But this process needs to be accelerated, and measures taken to strengthen the governance of these new corporations.1 To promote better governance of state enterprises, measures should be explored for ensuring a clear division of responsibilities between management and the board and regular publication of business plans and performance outcomes. Achieving sound governance in distribution will require ensuring full payment by public sector entities
43
Table 4.1. Investment Climate Reforms Undertaken in Bangladesh and Additional Measures Recommended
Deficiency by aspect of the investment climate
1. Infrastructure I: Power Highly deficient and unreliable supply Long delays in getting new connections to the public grid Imposition of informal payments on businesses
Government reforms undertaken since 2000 to tackle the problems

Commissioned two new independent power plants with a capacity of 810 megawatts at competitive rates Reduced system losses and increased bill collection in selected urban areas Improved the performance of the corporatized Dhaka Electric Supply Company (DESCO) and Power Grid Company of Bangladesh (PGCB) Continued the successful performance of rural electricity cooperatives in tariff levels (relative to urban tariffs), collections, and ability to turn around poorly performing distribution areas transferred from the Bangladesh Power Development Board (BPDB) and Dhaka Electric Supply Authority (DESA) Passed the Energy Regulatory Commission Act Implemented two tariff adjustments to improve cost recovery and reduce crosssubsidies between customer categories Developed a new power pricing framework, expected to be adopted shortly, to smooth the transition to tariffs that fully recover costs Approved a National Telecommunications Policy (1998) Approved the Telecommunications Act establishing an autonomous telecommunications regulatory authority
Recommended additional measures

Establish a professionally staffed reform directorate in the Ministry of Energy and Mineral Resources to strengthen sector reform capacity Accelerate financial restructuring and unbundling of the sector (see note a below) Develop a plan for private participation to improve efficiency, coverage, and financial performance in urban distribution Revise or update the strategy for expanding and financing generation Implement the new pricing framework Establish a new energy regulatory agency with strong enforcement powers and adequate financial and human resources
2. Infrastructure II: Telecoms Lowest teledensity in South Asia Lowest utilization of information technology by firms in South Asia
3. Infrastructure III: Transport Inefficient and costly services Port inefficiencies that hinder export growth
Developed a National Policy for Ports, Ocean Shipping, and Inland Water Transport (1998) Developed the draft Private Sector Participation Policy for the Shipping Sector of Bangladesh
Implement the plan for strengthening the new Telecommunications Regulatory Commission Establish a pro-competitive interconnection regime Permit the entry of new long-distance operators in competition with the incumbent operator Corporatize BTTB, initiate a restructuring program, and consider privatizing the entity in the medium term to further enhance competition Expand the container terminal capacity at Chittagong through private participation Move the ports to a landlord model separating operations and oversight and concessioning services to the private sector Proceed with development of the Khanpur Inland Container Terminal as a buildoperate-transfer project
Note a: The sector cannot assume substantial new liabilities (including power purchase agreements with independent power producers) without major financial restructuring supported by Parliament. (Table continued on next page)
44
Table 4.1. Investment Climate Reforms Undertaken in Bangladesh and Additional Measures Recommended (continued)
Deficiency by aspect of the investment climate Government reforms undertaken since 2000 to tackle the problems


Ensure adequate funding for road maintenance Corporatize Bangladesh Railways and establish a performance contract between that entity and the government Encourage the concessioning of specific services of Bangladesh Railways Promote further regional transport integration allowing movement of foreign trucks and railwagons Extend ASYCUDA++ and the closed loop system to key customs houses Further simplify customs procedures, including fully implementing the new duty drawback and bonded warehouse scheme Develop new human resource policies and an ethics code to improve staff compensation and reward good performance Consider establishing an independent revenue authority to support the above measures and foster better institutional performance Launch a national anticorruption plan, including the establishment of an independent commission Accelerate judicial reform Require members of Parliament and key officials to publicly declare assets and liabilities Require all ministries to publish annual reports for submission to the relevant parliamentary committee Develop a plan for improving the compensation and management of civil servants Streamline regulations and eliminate unnecessary ones
4. Governance I: Customs and Tax Administration Harassment of the private sector through frequent audits and informal payments Long delays in customs clearance
Simplified customs procedures Introduced ASYCUDA++ and closed loop system at the internal customs depot
5. Governance II Unnecessary regulations that cause delays and increase firms costs Harassment of the private sector through informal payments Inefficient functioning of courts
Initiated implementation of a Supreme Court decision ensuring separation of powers between the judiciary and the executive Adopted International Accounting Standards in the public sector and initiated work to separate accounting and auditing functions Established the Central Procurement Technical Unit to manage the reform of public sector procurement Recruited from the private sector or from overseas well-qualified Bangladeshis to fill key civil service reform positions
(Table continued on next page)
45
Table 4.1. Investment Climate Reforms Undertaken in Bangladesh and Additional Measures Recommended (continued)
Deficiency by aspect of the investment climate
6. Finance: Access to and Cost of Borrowing Poor access to credit (especially long-term credit) and high cost of borrowing, particularly for smalland medium-size enterprises
Government reforms undertaken since 2000 to tackle the problems

Enhanced the legal autonomy and authority of Bangladesh Bank to regulate and supervise banks, including NCBs and specialized development banks Increased capital adequacy requirements from 8 percent to 9 percent on a riskweighted basis; increased minimum capital requirements from 200 million taka to 1 billion taka; and allowed banks to declare dividends of more than 20 percent only if an equivalent amount is set aside for reserves Closed down 58 loss-making branches of NCBs Announced the sale of Rupali Bank

Implement the plan to strengthen the institutional capacity of Bangladesh Bank, especially in bank supervision Issue bank prudential regulations consistent with international practice Introduce professional management teams at the NCBs and sign performance contracts with their boards Consider transferring the ownership of other NCBs to the private sector, transforming some of them into savings banks in the medium term, or both Develop a secondary market for public debt Enhance the enforcement authority and institutional capacity of the Securities and Exchange Commission
Source: World Bank.
and enforcing antitheft legislation. Corporatization is best seen as an intermediate step, with privatization occurring when country conditions, the regulatory framework, and global conditions become more favorable.2 Developing a more transparent and competitive power sector will entail establishing the long-awaited independent regulatory agency to protect the longterm interests of consumers and create predictability for investors. The Energy Regulatory Commission Act, passed by Parliament in March 2003, provides for establishing an independent and empowered Energy Regulatory Commission. But the act leaves to the secondary legislation (rules and regulations) much of the work of guiding the procedures for establishing this independence and for exercising regulatory powers. Because an agency that is weak and nontransparent runs the risk of discouraging investment and being captured by vested interests, the government is encouraged to take special care to establish the Energy Regulatory Commission as a role
model for new institutions that can support a fair, efficient market for infrastructure services. Telecommunications The telecommunications sector has seen greater progress. In early 2002 an independent regulatory authority was establishedthe Bangladesh Telecommunications Regulatory Commission replacing the Ministry of Posts and Telecommunications as the regulatory and licensing agent. The new agency should be permitted to function as a truly independent body, vested with the authority to end the monopoly of the Bangladesh Telegraph and Telephone Board (BTTB) in fixed lines and to establish a pro-competitive interconnection regime. The planned corporatization of BTTB into a public limited company, with professional management and a more independent board of directors, will improve its operational flexibility but may not fully isolate it from political influence. That suggests a need to consider privatization for the medium term.
46
International experience over the past two decades has proved the importance of competitive markets and broad private participation for successful expansion of telecommunications services. That lesson has been borne out in Bangladesh, where private investment has driven the rapid expansion of mobile phones.3 Transport, Ports, and Customs Delays in ports and customs impose big costs on firms. Productivity at the container terminal in Chittagong is very low, and the port is already working beyond its capacity, creating serious congestion. Moving the portsespecially Chittagongto a landlord model separating operations from oversight could do much to improve efficiency. Also important is to proceed quickly with the much-needed expansion of container terminal capacity at Chittagong, involving the private sector.4 The development of the Khanpur Inland Container Terminal as a build-operate-transfer project should also receive support. Preparation for the bidding of the Khanpur terminal is already well advanced, thanks to assistance from the Infrastructure Investment Facilitation Center. Further development of inland waterways will ease the traffic pressure between Dhaka and Chittagong and allow a new channel of communication with Mongla port, opening fresh opportunities for Mongla to become a more important seaport. Other transport modes also need attention. Allocating adequate funding for road maintenance will be critical to prevent further deterioration of the road network. And the railways system, highly deteriorated and inefficient, will need a significant overhaul.5 Strengthening Governance Governanceespecially regulation and corruption is an important concern in Bangladesh, viewed by firms as a serious problem. There are no easy solutions. But the Interim Poverty Reduction Strategy
Paper recognizes the imperative of strengthening governance and the need to intervene on several fronts: Encouraging a greater flow of information. Establishing and enforcing clear rules and regulations for public sector administration, supported by the separation of power among the three branches of government. Promoting voice and participation of civil society to foster a more transparent government.
Initial steps have been taken in some of these areas, though many challenges remain. The government has adopted International Accounting Standards and initiated the separation of accounting and auditing functions. It has created a new central procurement unit to manage the reform of procurement processes. And, more important, it has reaffirmed its intention (and legislation is being drafted) to form an independent Anticorruption Commission that will replace the Bureau of Anticorruption, an ineffective agency that has suffered from much political interference.6 Complementing these efforts should be new disclosure requirements on assets and liabilities for high public officials and greater accountability for public institutions. Ministries, for example, could be required to publish annual reports with performance outcomes for discussion by relevant parliamentary committees. But broader public administration reform will be required to create a new governance framework. A few steps have been takensuch as stopping automatic recruitment to fill vacant positions and recruiting senior managers on contract from the private sector and abroad to address the severe skill shortage. But more far-reaching reforms will be needed, including rationalizing cadres and revising the skill mix while introducing better compensation packages and performance-based salaries. The sharp erosion of financial benefits and the weak
47
performance incentives have contributed much to the poor governance culture of the public administration (see Bangladesh 2000 and World Bank 2002b). Forcefully pursuing the Supreme Courts mandate to ensure separation of powers between the executive and the judiciary, together with other measures, would do much to lessen corruption and delays in the lower courts. So would decentralizing the lower judiciary, simplifying procedures, and introducing effective mechanisms to ensure transparency and accountability. Also important are modernizing the police force and improving the quality of officers and personnel through training programs. Creating an effective Anticorruption Commission (as discussed above) would help improve oversight of the police force. The short term offers opportunities for streamlining regulations and eliminating unnecessary ones, accelerating service delivery, and reducing the scope for informal payments. Procedures for the entry of new firms could be simplified, for example, reducing unnecessary costs and delays and encouraging informal firms to enhance their legal status and thus improve their access to finance. Customs and tax administrationwhere the survey findings point to cumbersome procedures, a high level of informal payments, and a large burden of inspectionswarrant particular attention. Efforts are under way to improve customs administration proceduresan important bottleneck to trade. The establishment of the Automated System for Customs Data (ASYCUDA++) has already speeded clearance of goods at the internal customs depot and reduced opportunities for informal payments; the completion of the closed loop system within a few months will add to these gains. Deploying these systems at larger customs sitesincluding the Dhaka customs house, Chittagong, and Benapol before the end of 2003 will bring even greater benefits. Initial reforms of tax administration are also under way.
Improving Access to Finance The survey findings portend potential problems in firms access to finance. Many firms appear to have exhausted the bank credit immediately available to them, financing is primarily short term, and its cost is high. Real borrowing rates have sometimes exceeded 10 percent in the past decade. The banking system is dominated by four large national commercial banks (NCBs), which create instability and stifle competition. The Interim Poverty Reduction Strategy Paper lays out some positive initial steps for addressing the distortions in the financial sector. These include increasing the sectors independence, enhancing regulatory authority, and strengthening the human resources of the Bangladesh Bank. For the NCBs, it proposes establishing more suitable representatives on the boards and new management teams, starting with Agrani Bank. Meanwhile, the government has offered Rupali Bank for sale. Achieving more permanent improvements in the banking systems performance will require deeper reforms for other NCBs. Ultimately, transferring their ownership to the private sector will be critical to isolate the institutions from political influence, introduce modern banking practices, and encourage new investments in information technology systems.7 Privatization will need to be coupled with strong prudential regulation, and for that reason the program of the Bangladesh Bank to strengthen regulatory and supervisory capacity should move forward with full force (World Bank 2003a). Capital markets remain at a nascent stage and enjoy little confidence among the limited number of investors. The development of a secondary market for public debt, essential for improving public debt management, would also facilitate the gradual growth of a broader market in fixed income securities. And strengthening the institutional capacity and authority of the Securities and Exchange Commission would foster greater transparency and improve the
48
governance practices of public companiescritical for boosting investor confidence. Over the past decade Bangladesh performed well on many macroeconomic indicators, became more integrated with the world economy, and made impressive social gains. But in many sectors it has lagged behind its neighbors and competitors. The result has been a widening gap in standards of living with such countries as China and India, though all three countries had similar per capita incomes two decades ago. Economic growth has been held back by deficiencies in the investment climatemost notably in infrastructure, governance, and finance. These issues are linked: the infrastructure services that appear to pose the largest obstacles for businesses are state-run operations, and the banking system continues to be dominated by the NCBs. As the country moves forward, the findings of the investment climate survey should help identify the reforms most critical to private sector development and facilitate consensus on a more far-reaching agenda of reform.
2.
3. 4.
5.
6.
Notes 1. Proper unbundling will entail determining how many electricity distribution companies and
7.
generation companies would be cost-effective in Bangladesh and developing a path of transition from the single buyer model to direct contracting between generators and eligible customers (such as large industries or bulk consumers). See World Bank (2003b) for a more extensive discussion of the power sector structure and critical sector reforms. See World Bank (2003b, 2003c) for in-depth analysis of reform priorities in telecommunications. Sri Lanka and India have allowed the construction of private container terminals next to the old public ports. The new private ports have instituted some competition, forcing some improvements in the public ports. See World Bank (2003b) for further analysis of ports, railways, and roads and key priorities for reform. The report of the Bangladesh Public Administration Reform Commission (2000), which provides a more detailed analysis of the situation, recommends forming an independent Anticorruption Commission vested with strong authority. Privatization might not be a viable option for all NCBs, however, and liquidation (or transformation into a savings bank) might also need to be explored.
APPENDIX 1
Sampling Methodology
Appendix 1 Sampling Methodology
50
Industrial statistics in Bangladesh are inadequate. There is no consolidated institutional effort to generate comprehensive, periodic data on industry. The quality of the statistical data that are available erodes during the long time lag between their collection and their publication. Official information based on the census of manufacturing industries by the Bangladesh Bureau of Statistics is lacking in quality. And the latest Directory of Manufacturing Establishments (covering firms employing 10 or more workers) dates to 1989 90. Lacking a reliable and updated universe, the investment climate survey team therefore had to develop its own sample frame. It adopted the methodology of assembling in one unique frame the establishment lists from different sources. The first step was to identify the strata to include in the sample. It was decided that the strata would be determined on the basis of firms activity, level of employment, and location. The sectors to be included in the survey were selected mainly on the basis of their importance as measured by value added, export potential, and recent growth trends. The sample frame of manufacturing establishments was grouped into six sectors: garments, textiles, leather and leather products, electrical and electronics, pharmaceuticals and chemicals, and food and food processing. It was also agreed that: The sample frame would comprise manufacturing establishments employing 10 or more workers. These would include both domestically and foreign-owned enterprises. The manufacturing units would be located in and around Dhaka (including Gazipur, Savar, Narsindi, Narayanganj, and Manikganj) and Chittagong (including Hathazari, Fauzdarhat, and Sitakundu), including the export processing zones in these areas. Establishments with head offices in Chittagong and Dhaka would be included in the sample frame.
Once the strata were agreed on, the team devoted its efforts to compiling the sample frame. While the most recent Directory of Manufacturing Establishmentswhich publishes results from the last census of nonfarm activities, carried out in 1986was considered too outdated to serve as a basis for the sample frame, the annual census of manufacturing industries, the main source of macro-level estimates for manufacturing, was more useful. The survey team obtained this list, which included firms name, address, sector of activity (classified according to the Bangladesh Standard Industrial Classification [BSIC] at the four-digit level), and size of employment. In a second approach the team canvassed all trade associations and chambers of commerce for their lists of members. The coverage and quality of these lists varied. For some subsectorssuch as textiles, garments, pharmaceuticals, and leatherthe lists were reasonably comprehensive and up to date. But none of the trade associations (except the Bangladesh Garment Manufacturers & Exporters Association) or chambers of commerce were able to provide employment figures. Moreover, small enterprises were underrepresented on the lists, because they have little incentive to join and pay the membership fee. A comprehensive list of trade associations and chambers of commerce was obtained from the Federation of Bangladesh Chambers of Commerce and Industry, the apex body for all national trade associations and chambers of commerce in Bangladesh. A total of 35 trade associations and 9 chambers of commerce were approached (see lists at the end of the appendix). A final effort was made to collect data from other government organizations that maintain some sort of list. Two of these were the Bangladesh Small and Cottage Industries Corporation and the Ministry of Labor and Employments Department of Inspection for Factories and Establishments (DIFE). The DIFE was approached in June 2002, when it was undertaking a nationwide survey of factories and establishments.
51
At that time the DIFE had prepared a list of about 9,000 manufacturing establishments throughout Bangladesh. Of these, about 5,000 were in the investment climate survey area, 3,000 were in the garment sector, and 500 were in textiles or leather. The DIFE survey is still ongoing and could serve as a valuable source of data for future research (although difficult to use, since the DIFE has only one computer, used for typing letters, and all data are filed in hard copies stored in open racks). The team painstakingly assembled all the lists into a single frame, identifying and dropping double entries and establishments classified in the wrong sector. To generate a panel, it included establishments covered in similar surveys. The final framethe sample frame used in the Bangladesh investment climate survey includes 9,189 establishments in six sectors and two locations (table A1.1). As noted, not all lists included information on the size of employment. Moreover, some lists simply indicated the category of employment, such as fewer than 50 employees or more than 50. This ruled out the chances of performing any sampling with a predetermined level of error. Data limitations as well as budget constraints led to a decision to implement a sample of 1,000 establishments drawn through a disproportionate stratified random sampling. The stratification is by
Table A1.1. Sample Frame Distribution by Sector

Share of total (percent) 5.84 6.51 9.90 59.10 4.28 14.37 100.00 Cumulative share (percent) 5.84 12.35 22.25 81.36 85.63 100.00
Sector Chemicals Electronics Food Garments Leather Textiles Total
Frequency 537 598 910 5,431 393 1,320 9,189
Source: World Bank.
sector and, when available, by size. It was also decided to cover two distinct locations, Chittagong and Dhaka. In addition, it was agreed to oversample establishments that applied for the matching grant facility program under the Bangladesh Export Diversification Projecta total of 124 establishmentsso as to be able to perform an analysis of this facility. Finally, based on experience with similar surveys, a 100 percent replacement rate was agreed on. The total sample frame of 9,189 was divided into two groups: a first subframe of 6,023 establishments for which data on employment were available (table A1.2) and a second subset of 3,166 for which no
Table A1.2. Subframe 1 Distribution by Sector and Size

Size of employment Sector Chemicals Electronics Food Garments Leather Textiles Total Source: World Bank. Small (1050) 141 95 315 53 27 223 854 Medium (51150) 12 15 14 98 3 20 162 Large (151+) 92 45 204 4,320 47 299 5,007 Total 245 155 533 4,471 77 542 6,023
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Table A1.3. Subframe 2 Distribution by Sector

Share of total (percent) 9.22 13.99 11.91 30.32 9.98 24.57 100.00 Cumulative share (percent) 9.22 23.22 35.12 65.45 75.43 100.00
Table A1.5. Final Sample Distribution by Sector and Location

Location Sector Chemicals Electronics Food Garments Leather Textiles Other Total Dhaka 68 55 102 271 90 221 5 812 Chittagong 17 36 45 35 9 41 6 189 Total 85 91 147 306 99 262 11 1,001
Frequency 292 443 377 960 316 778 3,166
Source: World Bank.
Source: World Bank.
employment data were available (table A1.3). The final sample was then proportionally assigned to the two subsets. In determining the probability of selection of units across strata, different sampling fractions were used within the strata to oversample small groups that were underrepresented (such as medium-size firms and establishments with matching grant facilities). For the subset of the frame with no information on the size of employment, a proportional simple random sampling was used. The location was not explicitly taken into account in determining the strata, since a proportional random
sampling would reflect the proportional distribution of the units across locations in the frame. In fact, the final sample distribution does cover both locations in proportion to their population weights. The complete sample distribution is shown in table A1.4, and the final sample distribution after completion of the survey in table A1.5. Trade Associations Contacted 1. Bangladesh Garment Manufacturers & Exporters Association 2. Bangladesh Knitwear Manufacturers & Exporters Association 3. Bangladesh Textile Mills Association 4. Bangladesh Specialized Textile Mills and Power Loom Industries Association 5. Bangladesh Terry Towel & Linen Manufacturers Association 6. Bangladesh Cosmetics & Toiletries Manufacturers Association 7. Bangladesh Aushad Shilpa Samity 8. Bangladesh Tanners Association 9. Bangladesh Finished Leather, Leather Goods & Footwear Exporters Association 10. Bangladesh Ceramic Wares Manufacturers Association
Table A1.4. Complete Sample Distribution by Sector

Share of total (percent) 10 10 13 30 10 27 100 Cumulative share (percent) 10 20 33 63 73 100
Frequency 100 100 130 300 100 270 1,000
Source: World Bank.
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11. Bangladesh Television Manufacturers Association 12. Bangladesh Rerolling Mills Association 13. Bangladesh GP & CI Sheet Manufacturers Association 14. Bangladesh PVC Compound Manufacturers Association 15. Bangladesh Paint Manufacturers Association 16. Bangladesh Agro Processors Association 17. Bangladesh Frozen Foods Exporters Association 18. Bangladesh Vegetable Oil Refiners and Vanaspati Manufacturers Association 19. Bangladesh Poultry Industries Association 20. Bangladeshiyo Cha Sangsad 21. Bangladesh Association of Publicly Listed Companies 22. Bangladesh Ayurved Parisad 23. Bangladesh Bread, Biscuit-O-Confectionary Prostutkarak Samity 24. Bangladesh Cold Storage Association 25. Bangladesh Electrical Merchandise Manufacturers Association 26. Bangladesh Dughdha and Dughdhajat Shamagri Prostutkarak & Baboshayee Samity 27. Bangladesh Electronic Manufacturers Association 28. Bangladesh Engineering Shilpa Malik Samity 29. Bangladesh Laban Mill Malik Samity 30. Bangladesh Marine Fisheries Association 31. Bangladesh Oil Mills Association 32. Bangladesh Rice Mill Owners Association 33. Bangladesh Salted & Dehydrated Marine Foods Exporters Association 34. Bangladesh Textile Mill Owners Association 35. National Association for Small and Cottage Industries of Bangladesh
Chambers of Commerce Contacted 1. Federation of Bangladesh Chambers of Commerce and Industry 2. Foreign Investors Chamber of Commerce and Industries 3. Dhaka Chamber of Commerce and Industries 4. Chittagong Chamber of Commerce and Industries 5. Narsindi Chamber of Commerce and Industries 6. Metropolitan Chamber of Commerce and Industries 7. Narayanganj Chamber of Commerce and Industries 8. Gazipur Chamber of Commerce and Industries 9. Manikganj Chamber of Commerce and Industries Other Sources Government Sources 1. Bangladesh Bureau of Statistics 2. Bangladesh Small and Cottage Industries Corporation 3. Bangladesh Export Processing Zone Authority 4. Board of Investment 5. Department of Inspection for Factories and Establishments, Ministry of Labor and Employment Others 1. Micro Industries Development Assistance and Services 2. Bangladesh Yellow Pages
Table A1.6. Value Added by Industry Category

Value added in millions of takas
Industry code Industry Total
Establishments in 1991 199192 92 1992 93 1993 94 1994 95 1995 96 1996 97 1997 98 1998 99
Share of value added (%)
Share of enter- Rank by prises value (%) added
Rank by enterprises
311-312 313 314 315 321 14,656 4,240 22,472 3,917 1,153 250 3,652 1,029 2,106 3,368 4,932 2,768 3,388 314 732 701 1,708 257 2,214 251 4,401 1,161 2,170 4,232 5,664 3,021 3,735 284 769 1,324 1,768 251 2,860 295 4,513 1,638 2,112 5,412 7,017 2,601 4,553 298 702 1,635 1,557 307 2,555 299 5,037 1,706 2,161 5,987 7,598 2,740 5,182 248 732 1,899 1,653 298 3,448 426 5,441 1,962 1,911 6,429 9,001 2,228 5,557 284 948 1,557 1,785 398 4,409 632 5,630 2,091 2,199 7,130 8,932 3,088 5,181 251 901 1,869 2,084 461 4,495 846 5,445 2,295 2,529 8,126 9,614 2,773 7,018 213 892 1,280 1,896 545 6,246 3,242 37,898 12,633 17,114 43,157 56,568 21,682 37,433 2,130 6,334 10,876 13,727 2,767 28,400 5,092 24,472 4,444 935 5,671 32,601 5,388 1,163 5,558 41,452 6,427 1,383 5,825 50,278 4,939 1,520 6,941 64,430 4,336 1,022 7,806 71,521 6,202 1,600 44,946 326,419 39,000 9,608 14,357 12,223 11,869 14,394 14,005 14,558 110,222 8.09 3.30 23.96 2.86 0.71 0.24 2.78 0.93 1.26 3.17 4.15 1.59 2.75 0.16 0.46 0.80 1.01 0.20 2.08
28,568 442 10,247 32
33,040 592 11,396 37
35,703 658 13,133 42
36,763 452 13,353 43
33,860 519 14,311 39
43,293 560 16,223 50
39,354 612 18,639 46
274,634 4,270 106,144 316
20.16 0.31 7.79 0.02
21.56 0.04 1.50 0.04 36.56 2.85 3.65 1.12 0.28 0.17 4.96 0.98 0.29 3.24 1.22 0.16 0.95 0.04 1.11 1.03 2.16 0.08 3.68
2 25 4 33 3 7 1 9 22 26 10 20 17 8 5 14 11 28 23 21 19 27 13
2 33 12 34 1 8 6 14 24 25 3 18 23 7 13 26 19 32 15 17 11 29 5
322
323 324 325 326-327
331 332 341 342 351 352 353 354-355 356 357 361 362 369 371-372 2,450 3,291 1,721 1,054 1,638 2,594 38 58 7 42 128 126,167 4,338 3,060 2,444 590 1,801 2,055 41 64 7 46 140 140,840 7,107 4,079 2,062 350 2,083 2,548 46 71 8 52 156 160,339 7,873 4,509 2,116 292 2,064 2,233 50 77 9 56 169 175,740 8,587 5,865 2,763 473 1,882 2,332 54 84 10 61 184 190,316 10,175 6,471 3,269 753 2,197 2,629 63 97 11 71 214 221,750 8,246 6,672 4,627 558 2,141 2,470 68 105 12 77 232 235,264
381 382 383 384 385 386 387 391 392 393-394
Food manufacturing 6,678 24,053 Beverage industries 12 435 Tobacco manufacturing 466 8,842 Animal feeds and by-products 11 27 Textile manufacturing (cotton, jute, silk) 11,326 14,160 Textile manufacturing (carpets, rugs, and so on) 882 3,813 Wearing apparel except footwear 1,130 19,193 Leather and its products 347 3,347 Footwear except vulcanized or molded 87 832 Ginning, pressing, and bailing of fiber; embroidery on textile goods 53 243 Wood and wood cork products 1,536 3,779 Furniture and fixtures manufacturing 305 751 Manufacturing of paper and its products 91 1,926 Printing and publishing 1,005 2,473 Drugs and pharmaceutical products 377 3,810 Industrial chemicals 51 2,463 Other chemical products 295 2,819 Petroleum and petroleum products 13 238 Manufacturing of rubber products 345 658 Manufacturing of plastic products 320 611 Pottery, china, and earthenware 670 1,276 Manufacturing of glass and its products 25 250 Nonmetallic mineral products 1,140 2,173 Iron and steel basic industry; nonferrous metal basic industry 203 2,381 Metal products 1,286 3,442 Fabricated metal products 697 1,823 Nonelectrical machinery 326 1,056 Electrical machinery 784 1,650 Manufacturing of transport equipment 177 3,102 Scientific and precision instruments 17 33 Photographic and optical goods 27 51 Decorative handicrafts 28 6 Sports and athletic goods 19 37 Jewelry and other manufacturing 247 112 Total 30,976 111,865 51,157 37,389 20,825 5,126 15,456 19,963 393 607 70 442 1,335 1,362,283 3.76 2.74 1.53 0.38 1.13 1.47 0.03 0.04 0.01 0.03 0.10
0.66 4.15 2.25 1.05 2.53 0.57 0.05 0.09 0.09 0.06 0.80
6 12 15 24 18 16 32 30 34 31 29
21 4 10 16 9 22 31 28 27 30 20
Source: Bangladesh Bureau of Statistics.
54
APPENDIX 2
Technical Appendix
Technical Appendix
56
Regression Analyses To analyze the data more rigorously, several equations are estimated using least squares regression analysis. Several versions of the following equation are estimated: yi = 0 + 1*(Investment climate measure)i + 2*Xi + 3Zi + i The dependent variable, yi, is a measure of firm performance that may be affected by the investment climate. Such measures include sales growth, employment growth, the investment rate, total factor productivity (TFP), and profitability (these measures are defined more precisely below). X is a vector of firm-level control variables and includes firm age,
employment in 2002, and sales in 2002. Z is a vector of industry and geographic controlsindustry fixed effects and a dummy variable indicating whether the firm is in Dhaka. Investment climate measures are the variables discussed in the report, including those representing international integration, infrastructure conditions, governance, corruption, technology, finance, and labor. The basic approach is as follows: The equation is estimated five times for each investment climate measureonce for each firm performance proxy. Moreover, the equation is estimated separately for each measure. The estimation does not at first include all the investment climate measures simultaneously for two reasons. First, not all firms provided answers to all questions, which causes some firms to drop out of the analysis. The more variables included at one time,
Firm Performance Variables

Variable Sales growth Employment growth Investment rate Total factor productivity Definition Average annual growth in sales for the past three years Average annual growth in total employment for the past three years Total new investment divided by the book value of current assets Total factor productivity is estimated using the following production function:
lnVi = 0 +
D (
ij j =1
jL lnLit
+ jK lnK it ) + i
where Vi is value added for firm i; Li is the number of employees; Ki is the capital stock, which is proxied by the original value of fixed assets; and Di is a dummy variable that takes the value 1 if firm i is affiliated with sector j. The analysis includes six industries. So the equation essentially allows sector-specific shares of labor and capital. Total factor productivity is then constructed as the estimate of i, the part of value added not explained by sector, capital, and labor. Profitability Value added divided by sales
Technical Appendix
57
the smaller the sample becomes. Thus estimating the equation with all variables simultaneously would result in too small a sample. Second, investment climate variables tend to be correlated with one another, causing collinearity problems when all are included simultaneously. Looking at each one separately helps avoid both these problems. The results of these regressions are shown in table A2.1. The table is constructed for viewing convenience. Each investment climate measure is estimated separatelynot with the othersalong with the firm and industry characteristics, which are not shown in the table. Instead, the table simply shows the coefficient on the investment climate measure, the statistical significance of the estimate, and the number of observations in that particular analysis. Simulations Constructing the simulations requires estimating the investment climate measures simultaneously. To deal with the problem of missing observations, the missing observations are replaced with the sector-city mean for that variable. This approach makes it possible to run regressions with the complete data set to derive the coefficients necessary to estimate the simulated results of improving investment climate measures.1 The results of these sets of regressions are shown in table A2.2. Indexes A common difficulty arising in investment climate analyses is that any one feature of the investment climate actually consists of several related factors. For example, theory and practice tell us that access to formal finance is important, but how can we measure it? The surveys collect several pieces of relevant information, but selecting a single one that represents finance is difficult. Including multiple finance variables in a regression, however, would lead to serious multicollinearity problems.
In two casesfinance and information and communications technologythis problem is solved by constructing principal components indexes. This type of index is intended to extract the maximum possible information from a series of related variables. The index is the linear combination of the variables that captures the most variation possible. The finance index is derived from three variables: the firms share of working capital from bank loans, its share of new investments from bank loans, and whether the firm has an overdraft facility. The information and communications technology index is derived using the share of the firms employees engaged in research and development (R&D) activities, the share of spending on R&D, the share of spending on communications, and whether the firm regularly uses email. The advantage of these indexes is that they capture a large amount of information on particular investment climate variables, where any single variable would provide an incomplete picture. Their main disadvantage is that while they are useful for comparison, their absolute values are not meaningful. That is, an index shows how one firm compares with another in access to finance or use of information and communications technology, but a score of, say, 0.2 is meaningless by itself. To deal with this problem, the indexes are presented along with some of their components.
Notes 1. As a robustness check, the regressions represented in table A2.2 were run with the imputed variables to see whether the imputations appear to affect the results. The results were qualitatively identical whether actual data were used or missing observations were replaced with city-sector means.
Technical Appendix
58
Table A2.1. Investment Climate Regression Results (pvalues in parentheses) [number observations in brackets]
Investment Climate Topic International integration Infrastructure Investment Climate Variable Export Sales growth 0.06 (0.000)*** [942] 0.01 (0.064)* [914] 0.00429 (0.54) [247] 0.002 (0.069)* [444] 0.00003 (0.97) [525] 0.04 (0.009)*** [948] 0.04 (0.001)*** [944] 0.01 (0.65) [945] 0.00002 (0.015)** [928] 0.00002 (0.087)* [291] 0.03 (0.010)** [767] 0.0004 (0.27) [947] 0.11 (0.000)*** [960] 0.0002 (0.22) [828] 0.010 (0.14) [853] Employment growth 0.04 (0.008)*** [955] 0.00105 (0.812) [926] 0.00272 (0.65) [259) 0.002 (0.009)*** [454] 0.00021 (0.68) [541] 0.03 (0.006)*** [961] 0.02 (0.018)** [957) 0.00 (0.87) [957] 0.00002 (0.004)*** [942] 0.00000 (0.82) [295] 0.04 (0.000)*** [772] 0.0001 (0.67) [960] 0.02 (0.64) [947] 0.0001 (0.46) [843] 0.01 (0.019)** [864] Investment rate 0.06 (0.040)** [395] 0.03 (0.001)*** [384] 0.00690 (0.62) [108] 0.004 (0.065)* [167] 0.00079 (0.48) [246] 0.05 (0.041)** [398) 0.01 0.75 [395] 0.00 (0.97) [395] 0.00001 (0.57) [397] 0.00003 (0.024)** [214] 0.02 (0.22) [322] 0.002 (0.055)* [399] 0.12 (0.61) [580] 0.0013 (0.32) [361] 0.005 (0.71) [365] TFP 0.11 (0.26) [578] 0.01508 (0.678) [559] 0.01240 (0.75) [145] 0.010 (0.078)* [238] 0.00522 (0.25) [324] 0.15 (0.067)* [581] 0.12 0.12 [578] 0.41 (0.066)* [578] 0.00012 (0.002)*** [577] 0.00012 (0009)*** [214] 0.21 (0.002)*** [474] 0.007 (0.001)*** [580] 0.17 (0.061)* [399] 0.002 (0.017)** [511] 0.012 (0.79) [519] Profitability 0.03 (0.55) [812] 0.01449 (0.42) [788) 0.00887 (0.25) [213] 0.006 (0.033)** [373] 0.00272 (0.085)* [458] 0.04 0.31 [816] 0.01 0.83 [812] 0.18 (0.062)* [812] 0.00002 (0.3) [804] 0.00003 (0.028)** [271] 0.07 (0.098)* [666] 0.0005 (0.66) [815] 0.02 (0.89) [815] 0.0005 (0.24) [715] 0.028 (0.21) [744]
Number of days last year experienced power outages or surges (x 100) Total wait (in days) for mainline telephone Connection (x 100) If export, average days from time goods arrived in port until cleared customs If import, average days from time goods arrived in port until cleared customs
Technology
Enterprise uses email regularly?
Are any transactions facilitated using email or the internet? Have you made financial transactions using the Internet Communication expenses in 2001/02 thousand takas Amount spent on computers
ICT (technology) index
Governance/ Corruption
Total visits by all agencies
Government visits per employee
Total unofficial payments as share of costs Finance Finance index
(Table continued on next page)
Technical Appendix
59
Table A2.1. Investment Climate Regression Results (continued) (pvalues in parentheses) [number observations in brackets]
Labor Share of labor not permanent 0.10 (0.001)*** [931] 0.03 (0.024)** [943] 0.02 (0.17) [925] 0.06 (0.011)** [946] 0.01 (0.26) [956) 0.03 (0.002)*** [937] 0.01 (0.84) [393] 0.05 (0.022)** [396] 0.03 (0.24) [391) 0.07 (0.73) [570] 0.16 (0.061)* [578] 0.18 (0.034)** [568] 0.01 (0.88) [804] 0.05 0.29 [813] 0.06 (0.17) [795]
Did your plant run formal in-house training for employees last fiscal year? Does firm employ staff exclusively for R&D/design?
* significant at 10%; ** significant at 5%; *** significant at 1% Note: Each cell represents a separate regression. Each investment climate measure is estimated independent from the other investment climate measures, with firm and industry controls, which are not shown here. Source: Authors calculations based on survey data.
Technical Appendix
60
Table A2.2. Regression Results Using All IC Measure Simultaneously

Average sales growth Investment climate measures Does firm export? Number of days firm experienced power outages or surges Total days waiting for goods to clear customs once arrived in port (sum of exports and imports) Visits per employee by government agencies Technology index Finance index Unofficial payments as share of costs Industry fixed effects Garments Textiles Food & food processing Electronics Chemicals & pharmaceuticals Other industries City fixed effect Dahka Firm characteristics Age Insale lnemp Constant Observations R-squared 0.27 (0.000)*** 1001 0.052 0.06 (0.000)*** 0.00012 (0.021)** 0.0003 (0.406) 0.07 (0.049)** 0.02 (0.035)** 0.011 (0.101) 0.0001 (0.647) 0.02 (0.231) 0.00 (0.977) 0.00 (0.885) 0.00 (0.859) 0.05 (0.087)* 0.02 (0.745) 0.01 (0.692) 0.00 (0.538) 0.02 (0.000)*** Average employment growth 0.03 (0.020)** 0.00000 (0.969) 0.0003 (0.336) 0.11 (0.000)*** 0.03 (0.001)* 0.010 (0.070)* 0.0000 (0.963) 0.04 (0.014)** 0.02 (0.311) 0.01 (0.626) 0.02 (0.275) 0.05 (0.011)** 0.02 (0.693) 0.00 (0.798) 0.00 (0.568) Investment rate 0.02 (0.048)** 0.00014 (0.001)* ** 0.0000 (0.998) 0.05 (0.089)* 0.01 (0.297) 0.004 (0.481) 0.0001 (0.563) 0.00 (0.862) 0.03 (0.071)* 0.03 (0.066)* 0.03 (0.148) 0.14 (0.000)*** 0.11 (0.008)*** 0.06 (0.000)*** 0.00 (0.281) 0.00 (0.310) 0.00 (0.840) 0.10 (0.013)** 1001 0.150 Total Pretax factor profit productivity 0.02 (0.565) 0.00014 (0.333) 0.0025 (0.020)** 0.03 (0.772) 0.05 (0.111) 0.022 (0.232) 0.0005 (0.171) 0.05 (0.431) 0.01 (0.906) 0.01 (0.933) 0.12 (0.098)* 0.04 (0.563) 0.03 (0.856) 0.04 (0.242) 0.00 (0.290) 0.04 (0.001)*** 0.04 (0.073)* 0.76 (0.000)*** 1001 0.037 0.06 (0.362) 0.00007 (0.734) 0.0002 (0.880) 0.22 (0.109) 0.13 (0.004)*** 0.003 (0.916) 0.0013 (0.022)** 0.01 (0.903) 0.01 (0.923) 0.04 (0.640) 0.05 (0.638) 0.08 (0.426) 0.04 (0.853) 0.09 (0.118) 0.00 (0.448)
0.03 (0.000)*** 0.19 (0.000)*** 1001 0.068
0.01 (0.965) 1001 0.023
p values in parentheses * significant at 10%; ** significant at 5%; *** significant at 1% Source: Authors calculations based on investment climate survey data.
APPENDIX 3
Standard Investment Climate Tables
62
Table A3.1. Sample Structure for Bangladesh Investment Climate Survey

Sample population Firm size Small Medium-size Large 229 214 539 Sample population Firm activity Garments Textiles Food Leather Electronics Chemicals Other 306 262 147 99 91 85 11
Market orientation Exporter Nonexporter Firm ownership Private, domestic Private, foreign State 956 29 3 404 581 Firm location Dhaka Chittagong 812 189
Table A3.2. Globalization of Markets and Inputs in Bangladesh, in International Perspective and by Type of Firm (percent)
High-capacity 60.4 36.1 3.5 49.4 43.5 7.1 Low-capacity 62.7 31.9 5.4 58.7 34.9 6.3 Non-exporter 99.9 0.1 0.0 60.1 32.6 7.3 Medium-size Bangladesh Domestic 60.5 35.2 4.4 52.5 40.4 7.1
Pakistan
Disposition of sales Sold domestically Exported directly Exported indirectly Source of inputs and supplies Domestic sources Imported directly Imported indirectly Not available. Source: Investment climate surveys. 52.5 40.6 6.8 90.0 86.1 92.1 76.2 16.6 7.2 64.4 25.9 9.7 37.8 56.7 5.5 52.7 46.6 0.8 41.8 52.1 6.1 61.2 34.7 4.2 84.9 13.4 1.7 74.1 18.3 7.5 43.1 45.6 8.2 89.2 9.9 0.8 67.7 25.1 7.2 46.7 48.9 4.4 71.4 28.6 0.0 5.5 84.4 10.1
Exporter
Foreign
Large
China
Small
India
63
Table A3.3. Firms Competitors, Suppliers, and Customers in Bangladesh, in International Perspective and by Type of Firm
High-capacity 50 0 8 0 20 0 Low-capacity 45 0 10 0 25 0 Non-exporter Medium-size Bangladesh Domestic 50 0 10 0 20 0
Pakistan
Exporter 100 0 8 0 1 0
Median number of competitors Domestic private firms State-owned firms Foreign-owned firms Median number of suppliers Domestic private firms State-owned firms Foreign-owned firms Median number of customers Domestic private firms State-owned firms Foreign-owned firms Not available. Source: Investment climate surveys. 20 0 40 0 0 30 0 30 0 5 0 40 0 60 0 10 0 40 0 0 10 0 10 0 8 0 10 0 6 0 50 0 27 0 0 6 4 40 0 50 0 70 0 32 0 35 0
Foreign
Large
China
Small
India
64
Table A3.4. Share of Firms Assessing Constraints to Operation as Major or Very Severe in Bangladesh, in International Perspective and by Type of Firm (percent)
High-capacity 22.5 72.1 23.4 26.1 32.9 47.8 40.0 8.7 16.6 16.1 36.5 45.6 41.3 36.8 55.8 37.7 28.5 Low-capacity 28.1 74.9 25.7 30.2 40.1 53.6 45.5 7.5 24.6 17.1 51.2 58.1 50.3 41.9 61.4 41.9 30.8 Non-exporter Medium-size Bangladesh
Domestic 24.3 73.8 23.9 27.3 35.4 49.8 42.1 8.6 19.3 16.7 42.2 50.0 44.1 38.7 57.7 39.3 29.3
Pakistan
Exporter
Constraint Telecommunications Electricity Transport Access to land Tax rates Tax administration Customs and trade regulations Labor regulations Skills and education of available workers Business licensing and operating permits Access to financing Cost of financing Regulatory policy uncertainty Macroeconomic instability Corruption Crime, theft, and disorder Anticompetitive or informal practices Not available. Source: Investment climate surveys.
24.4 73.2 24.2 27.5 35.4 49.8 41.9 8.3 19.3 16.5 41.5 49.8 44.4 38.6 57.8 39.2 29.3
9.2 39.2 9.9 20.4 45.6 46.0 24.5 15.0 12.7 14.5 37.5 42.6 40.1 34.4 40.3 21.5 21.3
16.5 28.1 19.4 16.3 34.1 23.7 21.1 19.4 26.7 15.9 24.1 21.6 28.0 26.0 22.4 15.7 17.6
19.8 75.8 21.1 25.1 32.6 41.4 27.3 5.3 15.4 11.0 41.4 47.1 35.7 27.8 50.7 36.6 30.4
30.0 75.1 29.6 33.3 40.8 55.9 51.6 10.8 23.5 19.2 53.5 55.4 55.9 45.1 61.0 45.5 33.3
23.0 70.6 22.9 25.7 33.3 49.8 43.1 8.7 18.4 17.5 35.9 47.8 42.0 39.6 58.0 36.8 27.3
20.8 67.8 20.8 26.0 26.7 43.3 35.6 9.2 17.6 17.8 35.9 43.1 37.4 29.2 54.5 34.4 22.3
26.5 76.4 26.2 28.4 40.6 53.4 45.4 7.8 19.8 15.4 44.7 53.7 47.8 44.5 58.8 41.9 34.1
31.0 55.2 27.6 34.5 41.4 51.7 34.5 0.0 10.3 10.3 20.7 48.3 51.7 37.9 58.6 31.0 27.6
Foreign
Large
China
Small
India
65
Table A3.5. Infrastructure Performance Indicators in Bangladesh, in International Perspective and in Selected Cities
Indicator Frequency of power outages (times last year) Production lost due to power outages (percent) Firms with own generator (percent) Firms with own well (percent) Production lost in shipment (percent) Days to obtain a telephone connection Days to obtain an electricity connection Days to obtain a water connection Exports as a share of sales (percent) Not available. Source: Investment climate surveys. Bangladesh 249.0 3.3 71.5 54.5 1.0 150.4 79.6 38.8 Pakistan 14.5 5.4 41.8 43.8 25.3 32.4 15.1 China 1.8 17.0 21.1 1.2 12.5 18.2 25.9 India 68.5 50.1 50.5 Dhaka 249.4 3.4 70.9 53.5 1.0 163.6 92.8 41.2 Chittagong 247.1 3.0 74.1 59.0 1.1 53.4 27.6 28.6
Table A3.6. Infrastructure Performance Indicators in Bangladesh, by Type of Firm

High-capacity 243.9 2.8 72.7 52.7 1.0 135.6 75.7 39.6 Low-capacity 258.6 4.2 69.0 58.1 1.1 179.9 86.6 37.3 Non-exporter 263.0 3.7 66.8 61.6 0.9 186.3 91.5 0.1 Medium-size
Domestic
Indicator Frequency of power outages (times last year) Production lost due to power outages (percent) Firms with own generator (percent) Firms with own well (percent) Production lost in shipment (percent) Days to obtain a telephone connection Days to obtain an electricity connection Days to obtain a water connection Exports as a share of sales (percent) Not available. Source: Investment climate survey.
271.3 3.7 37.3 46.7 1.0 101.2 62.0 10.8
270.8 3.9 68.2 62.6 0.8 196.1 108.8 32.3
231.8 2.8 87.5 53.4 1.1 154.2 77.8 53.3
250.4 3.3 70.8 53.8 1.0 150.3 80.7 39.5
207.7 3.8 86.2 79.3 1.1 95.8 31.0 28.6
230.6 2.5 79.0 43.6 1.1 110.4 71.7 94.5
Exporter
Foreign
Large
Small
66
Table A3.7. Sources of Finance for Firms in Bangladesh, in International Perspective and by Type of Firm (percent)
High-capacity 58.1 30.3 3.9 0.5 0.5 6.8 62.3 26.5 2.7 0.3 0.4 7.8 Low-capacity 50.7 39.9 4.7 0.5 0.4 3.7 54.8 36.3 2.4 0.6 0.2 5.7 Non-exporter Medium-size Bangladesh
Domestic 55.8 33.2 4.2 0.4 0.5 5.9 59.6 29.8 2.7 0.3 0.4 7.3
Pakistan
Exporter
Sources for working capital Retained earnings Banks and other financial institutions Trade credit Equity Informal sources All others Sources for new investments Retained earnings Banks and other financial institutions Trade credit Equity Informal sources All others Not available. Source: Investment climate surveys. 59.9 29.7 2.6 0.4 0.3 7.1 55.6 6.2 1.7 14.1 2.6 15.4 68.0 20.0 2.7 0.2 1.1 8.1 61.2 30.1 2.1 0.2 0.2 6.1 55.9 33.6 2.8 0.5 0.1 7.1 55.5 33.0 3.0 0.6 0.2 7.7 62.9 27.4 2.4 0.2 0.5 6.7 62.8 30.7 1.1 0.0 0.0 5.5 55.6 33.5 4.2 0.5 0.5 5.8 65.4 5.1 4.6 12.7 1.3 10.9 63.9 25.8 2.0 0.3 1.1 6.9 55.5 35.5 3.9 0.3 0.2 4.5 52.2 35.7 5.2 0.7 0.3 5.8 53.9 33.3 5.3 0.7 0.3 6.5 56.8 33.5 3.4 0.4 0.6 5.3 50.3 43.0 4.0 0.7 0.1 1.9
Foreign
Large
China
Small
India
67
Table A3.8. Firms Credits, Loans, and Liabilities in Bangladesh, in International Perspective and by Type of Firm (percent, except where otherwise specified)
High-capacity 63.8 21.7 57.1 67.8 87.1 12.4 36.5 6.9 33.2 25.0 55.8 Low-capacity 70.8 32.7 62.1 73.5 107.6 12.6 36.5 2.9 38.0 28.8 46.9 Non-exporter 67.8 22.6 64.5 75.1 99.6 12.8 35.6 5.1 34.6 27.0 54.9 Medium-size Bangladesh
Domestic 65.8 25.6 58.5 69.3 92.9 12.5 36.6 4.7 35.0 26.0 53.3
Pakistan
Share of firms with overdraft or line of credit Share of credit currently unused Share of firms with a loan from a bank or other financial institution
66.2 25.6 58.8
22.8 43.5 19.5
26.6 28.6 57.0
53.1 28.5 48.5
64.8 26.2 61.2
72.3 24.5 63.6
72.4 23.8 72.4
64.1 30.5 52.5
For the most recent loan or overdraft Share requiring collateral Average value of collateral required, as a share of loan Average interest rate on loan Average duration of loan Share of total borrowing denominated in foreign currency Long-term (one year or more) liabilities as a share of total liabilities Short-term liabilities as a share of total liabilities Equity and retained earnings as a share of total liabilities Not available. Source: Investment climate surveys. 69.9 94.6 12.4 36.5 5.4 70.6 72.9 14.8 8.3 0.5 83.0 88.9 6.6 14.3 8.1 3.2 67.4 83.2 12.4 37.5 8.0 74.1 95.7 12.1 36.0 3.5 68.9 96.8 12.6 36.3 5.1 80.0 125.4 11.3 35.8 12.3 62.0 85.7 11.8 37.9 5.7
34.8 26.4 52.9
7.4 14.2 56.4
16.8 73.6 42.1
27.5 21.7 44.3
36.0 24.4 64.0
38.9 29.3 49.4
33.0 25.9 49.7
31.6 36.9 41.7
35.1 25.6 49.9
Exporter
Foreign
Large
China
Small
India
68
Table A3.9. Financial Sector and Property Rights Indicators in Bangladesh, in International Perspective and by Type of Firm
High-capacity 68.2 2.8 1.9 21.7 65.3 29.1 71.0 60.0 39.6 71.7 Low-capacity 69.7 3.1 1.7 18.4 71.6 23.5 66.1 33.9 80.4 Non-exporter Medium-size Bangladesh
Domestic 68.3 2.9 1.9 21.1
Pakistan
Exporter
Financial sector Share of firms with audited financial statements (percent) 68.7 For check For domestic currency wire For foreign currency wire Property rights Land Share owned (percent) Share leased or rented (percent) Average length of lease or rental (months) Buildings Share owned (percent) Share leased or rented (percent) Average length of lease or rental (months) Not available. Source: Investment climate surveys. 62.1 37.7 74.3 90.5 9.0 91.5 64.6 34.3 64.5 66.5 33.1 77.8 74.1 25.5 70.6 54.9 44.9 74.2 47.3 52.4 72.5 72.2 27.4 76.9 61.1 38.6 74.7 80.2 19.8 60.0 67.4 27.2 83.5 88.0 11.6 54.0 25.2 70.3 26.6 77.2 81.2 17.0 73.0 60.3 31.9 87.6 54.6 34.8 73.5 75.4 22.6 94.1 66.7 27.8 80.6 78.4 17.9 2.9 1.9 20.6 41.6 1.9 2.4 3.2 74.8 4.7 5.3 3.8 36.0 2.7 1.6 13.8 66.3 2.9 2.6 17.8 83.7 2.9 1.6 24.1 77.7 3.0 2.2 29.9 62.5 2.8 1.6 13.8 87.0 3.0 2.2 14.7
Clearance time through firms financial institution (days)
185.4 106.0
196.2 116.8
Foreign
Large
China
Small
India
69
Table A3.10. Regulatory Burden and Administrative Delays in Bangladesh, in International Perspective and by Type of Firm
High-capacity 6.1 3.9 2.5 7.5 0.1 0.4 11.9 23.1 9.4 14.4 Low-capacity 11.1 5.0 2.4 15.1 0.3 0.3 11.2 23.4 7.8 13.4 Non-exporter 7.3 4.0 2.3 10.2 0.0 0.5 12.3 25.9 8.7 14.6 Medium-size Bangladesh
Domestic
Pakistan
Firms disagreeing that interpretations of regulations consistent, predictable (percent)
7.8
50.0
14.7
2.6
9.0
8.1
7.3
20.7
Share of senior managements time spent dealing with regulations (percent) 4.2 Informal payments to officials to get things done as a share of revenue (percent)
10.1
11.5
3.6
4.1
4.5
4.2
5.9
2.5
2.0
1.8 54.9
2.3
2.3
2.7
2.5
1.7
Share of revenue typically reported for tax purposes (percent) Inspections Days spent in inspections or required meetings with officials Share of meetings and inspections by local authorities (percent) Cost of fines or seized goods as a share of sales (percent) Share of interactions in which informal payment requested (percent) Informal payments as a share of sales (percent) Import delays (days) Average wait to clear customs Longest wait to clear customs Export delays (days) Average wait to clear customs Longest wait to clear customs Not available. Source: Investment climate surveys. 8.8 14.0 11.7 23.2 9.9 0.1
32.8 0.0
30.9 0.0
1.9 69.8
5.6 0.1
12.6 0.0
11.4 0.2
9.5 0.1
2.6
0.2
0.3
0.0
0.0
0.8
0.3
0.1
0.3
0.1
0.1
17.9 31.9
7.5 12.2
10.4 21.6
13.4 20.8
10.1 23.2
11.8 23.7
11.7 22.3
10.3 25.6
11.2 20.6
9.2 17.7
5.5 8.1
5.1 9.3
9.4 15.8
8.5 14.1
9.0 14.0
9.0 14.2
6.3 11.7
14.0
Exporter 7.0 4.7 2.8 9.5 8.9
Foreign
Large
China
Small
India
70
Table A3.11. GovernanceUncertainty and Corruption

High-capacity 6.1 6.5 0.5 11.3 2.5 Low-capacity 11.1 7.9 1.6 13.2 2.4 Non-exporter Medium-size Bangladesh
Domestic 7.3 6.7 0.9 11.3 2.5
Pakistan
Exporter
Uncertainty: Interpretations of regulations, consistent, predictable (% disagree) Share of profits reinvested in the firm Confidence in the judiciary (% disagree) Percent of payment disputes resolved in the courts Planning horizon for investments (months) Corruption: Percent of revenues needed for informal payments Percentage of firms saying gift/payment required for: (a) a mainline telephone connect (b) an electrical connection (c) a construction permit (d) an import license (e) operating license Revenue reported by typical establishment for tax purposes (%) Source: Investment climate surveys. 7.9 9.1 54.9 4.7 5.1 2.5 2.0 1.8 2.3 2.3 2.7 2.8 2.3 1.7 6.9 0.9 11.9 49.0 30.2 7.4 5.4 3.9 0.5 11.2 6.6 1.8 9.9 7.9 0.7 13.2 5.0 0.0 10.7 7.8 1.0 13.0 14.3 0.1 28.2
7.8
50.0
14.7
2.6
9.0
8.1
7.0
7.3
20.7
Foreign
Large
China
Small
India
71
Table A3.12. Technology Indicators in Bangladesh, in International Perspective and by Type of Firm (percent)
High-capacity 60.9 60.1 5.5 4.5 29.6 4.2 86.1 Low-capacity 57.3 62.6 8.1 3.4 21.8 5.3 84.7 Non-exporter 57.4 58.8 4.5 5.6 31.1 5.2 86.0 Medium-size Bangladesh
Domestic
Pakistan
Indicator
Share of firms with ISO certification Share of firms with technology innovations Developed a major new product line Upgraded an existing product line Introduced new technology that has substantially changed the way the main product is produced Discontinued at least one product line Agreed on a new joint venture with a foreign partner Obtained a new licensing agreement
17.0
50.4
44.7
39.5 23.7
Share of firms rating form of technology acquisition as first, second, or third most important Embodied in new machinery or equipment Hiring key personnel Licensing or turnkey operations from international sources Licensing or turnkey operations from domestic sources Developed or adapted within the establishment locally Transferred from parent company All others Not available. Source: Investment climate surveys. 59.7 60.9 6.4 4.1 27.0 4.5 85.7 11.2 26.6 9.0 14.4 57.2 6.0 93.8 79.2 19.4 55.9 50.9 18.9 23.7 54.2 62.0 3.2 6.9 38.9 3.2 88.4 51.0 62.6 6.3 6.8 30.1 5.3 84.5 65.7 60.3 7.5 2.1 20.5 4.9 85.1 59.8 61.8 6.2 4.2 27.3 4.2 86.0 57.7 50.0 7.7 0.0 23.1 15.4 76.9 64.0 64.3 9.3 2.3 21.0 3.8 85.0
Exporter
Foreign
Large
China
Small
India
72
Table A3.13. Labor and Training in Bangladesh, in International Perspective and by Type of Firm (percent, except where otherwise specified)
High-capacity 67.0 39.6 8.5 3.8 2.8 1.4 98.7 28.4 4.0 Low-capacity 63.2 36.2 10.9 5.7 3.7 1.9 99.6 23.1 4.4 Non-exporter Medium-size Bangladesh
Domestic 65.8 38.8 9.2 4.2 3.0 1.6 99.0 26.0 4.2
Pakistan
Exporter
Labor composition Share of workers who are permanent Share of permanent workers who are female Share of temporary workers who are female 65.3 38.5 86.6 3.0 1.9 85.9 44.5 20.8 59.7 18.3 31.8 50.1 13.9 62.8 20.0 76.2 50.3 67.6 52.7 63.9 24.9 71.3 33.7
Share of permanent skilled workers who are foreign nationals Labor turnover New employees as a share of total Employees who left as a share of total Average time to fill a skilled technical vacancy (weeks) Average time to fill a production or service vacancy (weeks) Desired level of workforce as a percentage of current level Training and education Share of workforce with less than 6 years schooling Share of workforce with more than 12 years schooling Share of skilled workers receiving training Share of firms offering formal training Labor unrest Days lost to labor disputes or civil unrest Not available. Source: Investment climate surveys. 4.1 26.6 9.3 4.4 3.1 1.6 99.0
8.2 5.3 1.5 1.2 97.0
12.4 2.9 87.4
6.2 0.6 82.8
8.6 4.8 2.1 1.1 98.9
12.7 6.0 3.3 1.8 99.3
8.2 3.6 3.4 1.7 98.8
10.7 5.2 2.9 1.7 98.5
8.3 3.8 3.2 1.5 99.3
8.6 9.6 3.9 2.2 98.4
34.9 9.5 36.0 11.1
1.7 11.4 45.5 69.6
27.2
14.9
27.7
31.0
30.8
23.8
34.5
1.3
0.3
5.4
4.8
3.3
4.1
4.2
4.8
Foreign
Large
China
Small
India
References
73
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in Africa. International Finance Corporation, Washington, D.C. Frankel, Jeffrey, and David Romer. 1999. Does Trade Cause Growth? American Economic Review 89 (3): 37999. Friedman, Eric, Simon Johnson, Daniel Kaufmann, and Pablo Zoido-Lobatn. 2000. Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69 Countries. Journal of Public Economics 76 (3): 45993. International Monetary Fund. 2002a. Bangladesh: Selected Issues and Statistical Appendix. Washington, D.C. . 2002b. Bangladesh: Staff Report for the 2001 Article IV Consultation. Washington, D.C. Kaufmann, Daniel, and Aart Kraay. 2002. Growth without Governance. Economia 3 (1). [http://www.worldbank.org/wbi/governance/pubs/ growthgov.htm]. Kaufmann, Daniel, Aart Kraay, and Pablo ZoidoLobatn. 1999. Governance Matters. Policy Research Working Paper 2196. World Bank, Washington, D.C. . 2000. Governance Matters, from Measurement to Action. Finance and Development 37 (2): 1013. . 2002. Governance Matters II: Updated Indicators for 2000/01. Policy Research Working Paper 2772. World Bank, Washington, D.C. Knack, Stephen, and Philip Keefer. 1995. Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures. Economics and Politics 7 (3): 20727. Lall, Sanjaya. 2001. Competitiveness Indices and Developing Countries: An Economic Evaluation of the Global Competitiveness Report. World Development 29 (9): 150125. Lansbury, Melanie, and David Mayes. 1996. Entry, Exit, Ownership and the Growth of Productivity. In David Mayes, ed., Sources of Productivity Growth. Cambridge: Cambridge University Press.
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Levine, Ross. 1997. Financial Development and Economic Growth: Views and Agenda. Journal of Economic Literature 35 (2): 688726. Li, Wei, and Lixin Colin Xu. 2001. Liberalization and Performance in the Telecommunications Sector around the World. World Bank, Washington, D.C. McMillan, John, and Christopher Woodruff. 2002. The Central Role of Entrepreneurs in Transition Economies. Journal of Economic Perspectives 16 (3): 15370. Recanatini, Francesca, Scott Wallsten, and Lixin Colin Xu. 2000. Surveying Surveys and Questioning Questions: Learning from World Bank Experience. Policy Research Working Paper 2307. World Bank, Washington, D.C. Sachs, Jeffrey D., and Andrew M. Warner. 1995. Economic Convergence and Economic Policies. NBER Working Paper 5039. Cambridge, Mass.: National Bureau of Economic Research. Smarzynska, Beata, and Shang-Jin Wei. 2000. Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence. Policy Research Working Paper 2360. World Bank, Washington, D.C. Stern, Nicholas. 2002a. The Investment Climate, Governance, and Inclusion in Bangladesh. World Bank, Office of the Senior Vice President, Development Economics, Washington, D.C. . 2002b. A Strategy for Development. Washington, D.C.: World Bank. Tybout, James. 2000. Manufacturing Firms in Developing Countries: How Well Do They Do, and
Why? Journal of Economic Literature 38 (1): 1144. Wallsten, Scott. 2001. An Econometric Analysis of Telecom Competition, Privatization, and Regulation in Africa and Latin America. Journal of Industrial Economics 49 (1): 120. Wei, Shang-Jin. 2000. How Taxing Is Corruption on International Investors? Review of Economics and Statistics 82 (1): 111. World Bank. 1998. Strategy for Establishing a Sound and Competitive Banking Sector. Vol. 1. Washington, D.C. . 2001a. Bangladesh: A Review of Public Enterprise Performance and Strategy. Washington, D.C. . 2001b. Finance for Growth: Policy Choices in a Volatile World. World Bank Policy Research Report. Washington, D.C. . 2002a. BangladeshPublic Expenditure Review. Washington, D.C. . 2002b. Taming LeviathanReforming Governance in Bangladesh: An Institutional Review. Washington, D.C. . 2002c. World Development Indicators 2002. Washington, D.C. . 2003a. BangladeshCentral Bank Strengthening Project. Washington, D.C. . 2003b. Bangladesh Country Framework Report on Infrastructure.Washington, D.C. Draft. . 2003c. BangladeshTelecommunications Technical Assistance Project. Washington, D.C. World Economic Forum. 2002. Global Competitiveness Report 2001/02. Geneva.

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Pilot Investment Climate Assessment

Improving the Investment Climate in Bangladesh

Acronyms and Abbreviations

ASYCUDA++ BEI BPDB BSIC BTTB DESA DESCO DFID DIFE

GDP NCBs PGCB UNCTAD UNESCO

Investment Climate Matters

Investment Climate Matters

Investment Climate Matters

Investment Climate Matters

Box 1.1. What Is an Investment Climate Assessment?

Investment Climate Matters

Table 1.1. Progress in Human Development, Bangladesh

Investment Climate Matters

Table 1.2. Investment and Savings as Percent of GDP, Bangladesh (19812002)

Table 1.3 GDP Composition of Selected Sectors, Bangladesh (19812002)

Source: Bangladesh Bureau of Statistics

Investment Climate Matters

GDP per capita growth rate Source: World Bank.

Investment Climate Matters

Investment Climate Matters

Bangladeshs Investment Climate in International Perspective

Low & middle income

Source: World Bank 2002c.

Bangladeshs Investment Climate in International Perspective

Source: World Bank 2002c.

Bangladeshs Investment Climate in International Perspective

Exports Source: World Bank estimates.

Bangladeshs Investment Climate in International Perspective

Strongest Source: World Economic Forum 2002.

4 Source: World Bank estimates.

Bangladeshs Investment Climate in International Perspective

Bangladeshs Investment Climate in International Perspective

0.29 0.16 0.08 0.03 0.1 0.1 0.12

Source: U.S. Energy Information Agency.

Bangladeshs Investment Climate in International Perspective

Bangladeshs Investment Climate in International Perspective

Source: Investment climate surveys.

Bangladeshs Investment Climate in International Perspective

Source: Investment climate survey.

Bangladeshs Investment Climate in International Perspective

1988 Fixed lines

Source: International Telecommunication Union 2002.

Fixed lines Source: International Telecommunication Union 2002.

Bangladeshs Investment Climate in International Perspective

Bangladeshs Investment Climate in International Perspective

Bangladeshs Investment Climate in International Perspective

Source: World Bank, Doing Business database.

Cost as a percentage of gross national income per capita

Bangladeshs Investment Climate in International Perspective

Bangladeshs Investment Climate in International Perspective

Note: Data are for 2000. Source: World Bank.

Bangladeshs Investment Climate in International Perspective

Indonesia Philippines Thailand China Malaysia Bangladesh 0 Strongest 10 20 30 40 50 60 70

Source: World Economic Forum 2002.

Bangladeshs Investment Climate in International Perspective

Utility patents (X 10)

Source: United Nations Educational, Scientific, and Cultural Organization (UNESCO).

Bangladeshs Investment Climate in International Perspective

The Effects of Bangladeshs Investment Climate on Firms

Source: Investment climate survey.

The Effects of Bangladeshs Investment Climate on Firms

0 Sales growth Employment growth Investment